Cash News
Bitcoin lending is returning to digital assets, but with some key changes.
Bitcoin lending is back on the rise. It is recovering, but with some changes.
The collapse of Genesis, Celsius, and BlockFi in 2022 sent painful ripples across the crypto industry. These firms led the charge for digital asset lending markets and soared to massive valuations with estimates of $50 billion in total loans at peak.
Unfortunately, they were led by inept and/or unethical leaders that gambled with other people’s money and lost. I know this firsthand, as my own mother, upon my advice, had six figures locked in BlockFi for years. Now as the lawyers pick apart the carcasses of these firms’ bankruptcy proceedings, raking in ridiculously exorbitant fees, the industry has started to revivify. We’re now starting to see large bitcoin miners, family offices, asset managers, and more start to take out hundreds of millions in new loans. What has changed?
The previous wave of institutional lenders rehypothecated funds and traded them for additional profit. BlockFi and others famously lost hundreds of millions in the “widowmaker trade,” buying Grayscale BTC Trust shares (before it was an ETF), carrying it for the mandatory six month lock-up period, and then selling on OTC trading markets. This worked great until supply overwhelmed demand and the product started trading at a discount to NAV in secondary markets for years.
Savvy to this risk, it seems the majority of new demand is for BTC-secured loans in segregated custody. This means the collateral goes untraded and thus can’t disappear with the poor judgment of overeager start-up entrepreneurs looking to make a buck. Lending should be boring!
Investors are also taking a keen eye to risk management on these loans. Using derivatives, margin calls and liquidations can be completely avoided. This of course adds a bit of cost to the loan, but it’s much more expensive to go out of business due to poor treasury management. With derivatives trading, the blow ups of the last cycle can be avoided regardless of what happens in the market. With spread structures, the margin requirements here can be quite low. In addition, coupled with low margin derivatives trading for yield, the interest on the loan can often be completely offset. Some investors are prioritizing this approach, preferring peace of mind to HODL YOLO mindsets.
Lastly, traditional financial firms are coming to see the light in terms of providing capital for these loans. Historically, BTC and other cryptocurrencies have been seen as risky and volatile assets not fit for lending against. But, if you compare it to something like a house as collateral, its virtues are evident. Bitcoin is more liquid, provides real-time price discovery, and has legions of buyers around the world. With the loans being overcollateralized, cool heads can ensure very safe management of these loans. Capital partners that can see through the fog of fear and bias and want to benefit from a premium on being early here are seeing the rewards.
In short, the lending markets are coming back to life. A more mature approach that prioritizes safety and transparency is winning the day. Bitcoin continues to enter the mainstream and lending markets will play a pivotal role.