Crypto lending businesses are prospering from bitcoin’s collapse, as both borrowers and investors aided in bringing in higher revenues. There has been a reportedly lower risk for lenders due to collateral and margin calls. Some lenders reported ten-fold customer growth and increased hiring as per a Bloomberg report on January 2, 2018.
Bear Market? Far from a Deterrent
The year 2018 was a nightmare for the number one cryptocurrency. Concerns over regulation, intermittent exchange hacks, and a general slowdown in trading resulted in more than a 70 percent decline in its price. Many crypto startups struggled to keep afloat while many others had to downsize their staff or even cut their losses and run.
In the midst of all this chaos, one sector was slowly thriving in 2018 – the crypto lenders.
The bear market aided in fueling the growth of the crypto lending sector because of a unique advantage: The demand from both borrowers as well as prominent investors who are interested in short selling.
The borrowers are the investors who had already invested their money in cryptocurrencies but are at a loss. So, these borrowers borrow money from the lenders while waiting for a rebound in the prices.
On the other hand, there are also significant investors expecting a further drop in the crypto prices. These investors come to the crypto lenders for borrowing cryptocurrencies for short selling.
Low Risk, Higher Reward for Lenders
The lenders are playing a smart game, by giving out only low-risk loans.
For instance, Genesis Global Trading Inc. allows institutional investors to borrow cryptocurrencies by depositing U.S. dollars. However, to take out say, $1 million worth of crypto, the company requires $1.2 million in fiat to be deposited. The company CEO Michael Moro has admitted, “We’ve been profitable from day one.”
On the flip side, the businesses that accept cryptocurrencies as collateral for giving out cash loans are also playing it safe. To avoid the “burn” from any freefalling crypto prices, the companies give out only roughly 50 percent of the crypto value as the cash loan. They also have the added safety net of margin calls in case there is a drop in the value of the crypto placed as the collateral.
For example, the New York-based secured lending with crypto assets as collateral, BlockFi gives out $5,000 in fiat only if the customer deposits $10,000 worth digital coins. Their margin calls are triggered whenever the price falls by 35 to 60 percent from the price at which it was pledged.
Expansion on the Cards
Many crypto-lending marketplaces like ETHLend are currently fast-tracking into profit and opening up new offices across the globe. While BlockFi’s customers expanded by tenfold, others like Salt Lending are hiring more employees to keep pace with the demand.
Encouraged by this profitable trend, some companies are planning to increase their product offerings like the Bitcoin interest-bearing savings account and a loyalty card earning crypto from BlockFi.