Author: Craig Birchall, CFA, Product Director at Membrane Labs, CoinDesk; Translated by: Deng Tong, Jinse Finance
In 2022, the cryptocurrency lending market collapsed after a series of catastrophic events, including the collapse of LUNA/UST, the bankruptcy of Three Arrows Capital, and the bankruptcy of FTX. During this period, many major lenders that accounted for a large share of the lending market were forced to close their doors, including BlockFi, Celsius, Voyager, and Genesis. However, one of the few silver linings that emerged from this period was that it exposed many problems in the market structure and provided a blueprint for how to build a healthier ecosystem in the next cycle.
The cryptocurrency lending market peaked in 2021-2022 amid huge cryptocurrency returns and years of low interest rates. As loan defaults were uncommon during the bull market and investors were hungry for revenue growth, many cryptocurrency lenders found themselves caught in a race for absolute yield, with risk pricing and portfolio health becoming secondary concerns.
Increasing competitive pressure on structure/terms has led to a surge in unsecured lending, loosened underwriting/due diligence standards, and increasing allocations to high-yield DeFi strategies. This highly leveraged environment becomes a powder keg when some bad catalyst brings everything down.
Two years later, the market looks very different and we are finally starting to see strong signs of recovery. Catalyzed in part by the launch of a Bitcoin ETF in the U.S. in January, institutional lenders saw rapid expansion in 2024. Here are some examples from publicly reported data:
Coinbase Prime’s financing business reported a 75% quarter-over-quarter increase in its loan book, from $399 million to $700 million in the first quarter of 2024.
Crypto lending platform Ledn publicly reported that institutional loans issued in the first quarter of 2024 were $584 million, a 400% increase from the previous quarter.
Membrane, a loan technology provider (also my employer; full disclosure), reports that loan bookings in the first half of 2024 were 3 times higher than in all of 2023.
Risk Management Practice
Lenders take risk management very seriously, keen to avoid loan losses and maintain the trust of their counterparties. In stark contrast to 2021, detailed entity due diligence and asset verification are now standard onboarding practices.
Overcollateralized lending has come to dominate lending activity, with many borrowers insisting that their collateral be held by a custodian in a three-party manner. Unsecured lending has a much smaller market share, is now typically limited to select, well-capitalized borrowers, and often includes structural protections and/or ongoing monitoring requirements.
Transparency is also a focus , as many lenders and their capital providers require transparency into borrowers’ use of loan proceeds, while many borrowers require constant monitoring of the wallets where their collateral is held.
New players and innovative technologies
New lenders entering the market are likely growing faster now than at any time since 2021. Swiss banks such as Sygnum, Amina, Dukascopy, etc. have gradually entered the market, and other large institutions in the traditional financial market are also entering the field, such as Cantor Fitzgerald announcing a new Bitcoin financing business with an initial funding of $2 billion. These new entrants will be able to provide funding to the wider trading community as well as existing lenders in cryptocurrencies, ultimately driving a stronger and more liquid market.
Large custodians such as BitGo and Copper have leaned into prime financing business, many new credit funds have been launched in the Asia-Pacific region, and some ETF issuers are actively exploring how to deploy assets to generate income.
Improved lending and collateral management tools have enabled many lenders to reduce risk and expand their product offerings. A prime example is lending platform Trident Digital, which has developed products that provide leverage to trading firms without the need for capital to be traded over the counter, providing traders with the benefits of capital efficiency while lenders always remain overcollateralized.
From more efficient risk-based margin capabilities to visibility into the use of loan proceeds, institutions now have a wider range of tools to reduce counterparty risk and gain confidence in trading with new partners.
The sustainability of crypto financing and its continued growth depends on balancing innovation with risk management. Prudent risk management practices combined with tools that provide transparent, secure, and efficient lending services are critical to building a strong and efficient crypto lending market.
