Why You Need To Know About Crypto-Collateralized Loans

by | Jun 25, 2019 | Uncategorized | 455 comments

As I’ve covered recently, cryptocurrency collateralized debt (crypto-backed loans) have some serious disruption potential and should help fuel some movement as they find a larger audience. 

 

But let’s go a little deeper. 

 

Genesis Capital recently reported they closed the year with over $1.1 Billion in originations and that they doubled their loans in the last quarter of 2018. The major catalyst for that came from Bitcoin’s drop below the $6,000 mark. 

 

The loans that Genesis originates allows investors to take positions on the down-side. Michael Moro, CEO of Genesis Global Capital, disclosed to Forbes that approximately 10% of their Bitcoin loans used to short the market. Not surprising there, but the majority of loans were used for short-term requirements of Bitcoin suppliers as well as those seeking spot market arbitrage opportunities.

 

As I mentioned, the market for crypto-collateralized loans is also growing. Genesis reported that they had seen $20Mn in loans backed by cryptocurrency — a service they only recently got off the ground. In a report they stated, “In response to client demand to borrow USD against crypto collateral, we launched a cash lending pilot program. The reception has been quite strong and we have decided to officially launch the new fiat currency lending business.”

 

So, that’s all well and good to see the crypto loan industry is moving along well in the face of market adversity, but what about on the retail investor side?

 

After all, I’ve sang the praises of Compound.Finance and the ability to be a DAI liquidity provider, earning interest on your stableasset while you wait for your buy opportunity. As I’ve previously covered, the market peaked at 17% APR but was recently trading at 4%. At the time of writing, DAI lending has spent a couple weeks hovering between 2.4 and 2.7%. 

 

What’s crazy is that a platform that allows for retail investor risk exposure has taken off in such a short amount of time, with Compound seeing inflows and outflows of 85M since launching in September. With the end of January, gross supply exceeded $20M.

 

I see this trend only expanding. 

 

Borrowers are looking for more trading exposure on the upside of a clearly oversold market that hasn’t done much in nearly 3 months. 

 

Why risk your entire position being liquidated through trading margin on Bitmex when you can just accept a 2% fee for upside potential? 

 

Think about it: these are two ways to leverage more than your account position, but one is inherently much less riskier. 

 

It’s no surprise borrowing cheap capital is the best way to benefit from a swing in the market because you’re able to trade above your grade. 

 

Of course, you accept the risks of doing so, but if your intent is making big plays this is one way to do it. 

 

Furthermore, cheap capital is only a temporary occurrence, and sometimes predicates worse things to follow. Low interest rates are the equivalent of having a diet consisting of high sugar foods and lots of carbs: not good for long term results! 

 

Over this year we’ll continue to see financial services on chain continue coming online. 

 

Recently we saw the launch of yet another crypto-backed loan service (which is the third way to overleverage your account) in the form of Consensys-backed Nuo. Meanwhile, risk seekers looking to short ETH can find leveraged options on dYdX’s Expo Trading platform.

 

Again, do so at your own risk and peril. 

 

But, knowing is half the battle, and this is a very interesting time.

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