- The crypto lending market is experiencing a rare boost
- Crypto lending thrives on ample collateral and margin calls
- True magic in crypto lending happens in a bear market
The crypto lending sector is experiencing booming business as the rest of the market suffers the effect of the prevailing crypto winter. The lenders in the crypto industry are smiling all the way to the bank as crypto investors and related business struggle to remain afloat.
Lenders Make the Most out of the Bear Market
A January 2, 2019, report on Bloomberg says creditors based on the cryptocurrency industry still have an increased demand from borrowers who are unwilling to sell their digital coins at low prices besides large-scale investors eager to borrow coins for short selling.
While some big names in the cryptocurrency industry such as Bitmain, Huobi, and ConsenSys, among others felt the pinch experienced declining revenues and resorted to closing business in some locations or laying off employees, crypto lenders are instead enjoying better times.
Speaking to Bloomberg during a telephone interview, Michael Moro, the CEO of Genesis Capital said the bear market had fueled their growth. He added that apart from planning to double tier current staff, they are also planning to expand to other regions and especially the Asian territories “when others are downsizing.” He explained:
“We’ve been profitable from day one… We’ve certainly proven that there is market demand, that there’s product fit and that it’s time to invest even more in this side of the business.”
The publication reported that the revenues of another crypto lender BlockFi have actually grown tenfold from June 2018 following the decision by Michael Novogratz’s Galaxy Digital Ventures decision to invest $52.5 million in the firm. The company, according to CEO Zac Prince offers “a low risk type of lending” by lending fiat currency to clients who deposit cryptocurrencies and the Prince declares they have “never had a loss of principal.”
Principally, there are two main reasons investors will consider crypto-related lending. The first gained prominence during the 2017 bull-run when investors used their crypto holding as collateral to get cash loans to fund their daily life issues like paying bills and home renovations, which enabled them to obtain cash without having to cash out their holdings.
The second reason for collateralizing crypto assets is short selling, where investors place a bet that the prices of crypto assets are likely to decline. At the close of business when the open short closes, the investor who places a bet receives cash or additional crypto tokens depending on how they inked their contract but if the price increases they incur a loss. Commenting, Aave CEO Stani Kulechov told Bloomberg:
“Everything flies in the bull market, but true magic happens when it does well in a bear market, […] the crypto-backed lending model is one of the rarest.”