Unless you’ve been living under a rock, you will have heard that some people made fortunes in the early years of crypto, while others lost everything. Volatility continued to characterize markets until what we’ll call the Middle Ages of crypto, culminating in the 2022-2023 bloodbath. As markets stabilize, new lending models ease entry for new users and make digital assets more accessible, facilitating a transition to mass adoption.
It’s generally possible to infer a myriad of aspects about the financial system’s overall health if you’re familiar with the state of lending markets, as they are a microcosm of the broader picture. This is valid in digital assets, like in all other markets, and no matter where the economy is in the bull-and-bear cycle.
Minimal lending before DeFi summer
The earliest crypto lending market data goes back to around 2018-2019. We learn from Genesis Trading’s quarterly reports that a few early crypto whales were willing to lend tokens, and a few hedge fund short sellers were interested in borrowing them, but that was about the extent of it. The reports tell the tale not so much of a global asset class market as of a fish market.
All of that changed with DeFi summer in 2020. Loan originations grew from $17 billion to more than $130 billion between 2020 and 2021, almost an eightfold increase in activity year-over-year. CeFi lenders’ valuations swelled as they were showered with hundreds of millions in equity capital, so to justify their massive valuations, they needed to grow at all costs.
Everything is rosy until you prick yourself on a thorn
CeFi lenders faced structural issues under the hood. Competition was cutthroat, with borrowers shopping around for the best terms and lenders chasing promises of incremental yield. Low-cost access to leverage from exchanges and high yields that liquidity mining incentives subsidized drove lenders to take on more risk for lower rewards to gain customers. It was a recipe for disaster, the first manifestation of which was the collapse of Terra’s UST and LUNA. After these and subsequent catastrophes, the market became more stable to retail users’ delight.
Until recently, though, digital asset ownership remained complex for most retail users. The lack of structured financing models, market volatility, and high upfront costs made digital assets akin to luxury items, accessible mainly to those with significant capital. Bitlease addresses many of these pitfalls with its lease-to-own crypto (LTO) model, which fundamentally transforms the concepts of digital asset ownership, investment, and financing. The model reduces the price fluctuation risk for users, allowing both lenders and borrowers to operate in a stable, insured environment.
Exploring the LTO model
The user chooses a cryptocurrency, the down payment amount, and the installment term, and the cryptocurrency is recorded in their Bitlease Ledger account upon confirmation of the off-chain agreement. At the end of the installment term, the user obtains full ownership of the asset, which can happen earlier if the loan has been repaid in full.
Let’s take these initial contract terms as an example: 1 BTC is worth $50,000 with a down payment of 30%, or $15,000. The remaining payment equals 70%, or $35,000 in installments. The user’s consequent economic exposure is 1 BTC. Then, the BTC price rises to $100,000. The user has an exposure value of $100,000, $35,000 left to repay, and a profit of $50,000, capturing the upside. They can pay off the $35,000 using part of the $100,000 sale and withdraw the surplus.
The user doesn’t owe the current price of the asset, just the scheduled remaining payments. They benefit from price appreciation without paying more, and they retain full price exposure after paying only 30%. There are no margin calls. Bitlease has signed a collaboration agreement with HyperHedge for algorithmic hedging and insurance for all of its leasing contracts. HyperHedge ensures default absorption, continuous solvency, and zero reliance on collateral, no price dependency, and no liquidation events. It does not speculate, use leverage, take directional trades, or rely on predictions.
Safety comes with fees, whose volume depends on the size of returns. Market price volatility does not impact a contract, which can be terminated only when overdue payments and penalties amount to two full installments. This is typically the case after ten days if the user doesn’t make any payments, as the daily penalty is 10%. When a contract is terminated, penalties and debt are settled, the cryptocurrency is executed at a controlled spread, and the user receives any surplus value.
Declining volatility encourages broader crypto adoption
According to a research report by Fidelity Digital Assets, Bitcoin is less volatile than 92 of the stocks in the S&P 500 index and 33 of the index companies based on historical volatility figures. Among those companies were Netflix and all seven high-performing tech stocks (“The Magnificent Seven”). Fidelity has concluded that “Bitcoin’s volatility does not appear as an outlier.” Market observers assert that the crypto market’s “wild swings” are attenuating as liquidity increases, institutional participation grows, and derivatives and hedging infrastructure improve.
However, “less volatile than in the wild early days” doesn’t mean “stable.” For cryptocurrency, “lower volatility” may still be “high volatility” compared with some traditional assets.
From narratives to user interest
Bitcoin was trading at just over $16,000 at the beginning of 2023, but it had almost tripled by the end of the year. Crypto narratives drive flows, which drive price movements and user interest, in turn reinforcing the narrative. This is a fact anyone who has spent any length of time in this market can testify to.
