After 2022’s Bust, Scars Are Healing In Crypto Lending

In 2021-2022, the market for cryptocurrency lending reached its height due to substantial returns from cryptocurrencies and prolonged periods of low-interest rates. Since loan defaults are rare during bull markets and investors demand rapid growth, numerous crypto lenders focused more on achieving maximum yields rather than risk assessment and maintaining portfolio health.

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As competition intensified and the need to adapt grew, there was an expansion of lending without collateral, a loosening of credit assessment practices, and an increase in investments in high-risk DeFi strategies. This highly-indebted situation turned out to be a powder keg waiting for a spark, which came with a few negative triggers that ultimately caused everything to collapse.

Approximately two years on, the market landscape has significantly changed and we’re now observing robust indicators suggesting a rebound. This transformation, to some extent, was accelerated by the introduction of Bitcoin ETFs in the U.S. back in January. As a result, institutional lenders have experienced remarkable growth in 2024. Here are some instances illustrating this growth from publicly available data:

Risk Management Practices

Lenders are focusing strongly on risk control, wanting to avoid loan defaults and preserve the confidence of their partners. Unlike last year, thorough investigation of borrowers and confirmation of assets have become common procedures during the application process.

As a researcher studying the loan market dynamics, I’ve observed that over-collateralized lending has significantly increased in prevalence, making up the majority of active loans. Many borrowers are demanding that their collateral be held in custody with a third party to ensure security. On the other hand, unsecured lending represents a much smaller portion of the market and is primarily extended to well-capitalized borrowers who meet stringent criteria. These loans often come with structural safeguards and continuous monitoring requirements to mitigate risk.

In this context, transparency has become a priority for both lenders and those providing their capital, as they seek clarity to track how loan funds are being used by the borrowers. At the same time, many borrowers are also requesting continuous insight into the places where their collateral is kept.

New Participants & Innovative Technologies

Since 2021, it seems that an increasing number of new financial institutions are entering the market compared to any previous period. Among these are Swiss banks like Sygnum, Amina, Dukascopy, and others. Additionally, large traditional financial players, such as Cantor Fitzgerald, are also making their way into this sector, as shown by their announcement of a new Bitcoin financing business with an initial investment of $2 billion. These newcomers will not only provide capital to the broader trading community but also support existing crypto lenders. This influx is expected to strengthen and increase liquidity in the market, leading to a more vigorous and dynamic trading environment.

Major custodians such as BitGo and Copper are expanding into lending services, a growing number of credit funds are being established in the Asia-Pacific region, and various ETF providers are actively seeking ways to utilize their resources for income production.

As a crypto investor, I’ve noticed how advancements in loan and collateral management tools have significantly boosted the power of lenders. These improvements enable them to effectively manage risk and broaden their product range. A clear demonstration of this is Trident Digital’s lending platform. They’ve developed solutions that allow trading firms to gain leverage without withdrawing funds from exchanges, a feature that enhances capital efficiency for traders while ensuring lenders always maintain over-collateralization.

Institutions now have access to a broader set of tools that empower them to enhance counterparty risk management and build trust when dealing with new business associates. These tools include advanced risk-based margin systems, which improve efficiency, and mechanisms for monitoring the application of loan funds, thereby providing greater insight into transaction partners’ activities.

The sustainability of crypto financing and its continued growth hinges on balancing innovation with risk management. Prudent risk management practices paired with tools that provide transparent, secure, and efficient lending services are critical to building a robust and efficient crypto lending market.

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