Bitcoin ETFs, Bankruptcy Paybacks Have Given Crypto Lending a Second Wind

Mauricio Di Bartolomeo, the co-founder of crypto lending firm Ledn, shared his perspective during an interview with CoinDesk at the Consensus 2024 conference in Austin, Texas. He expressed that the market, despite appearances, hadn’t truly departed. Instead, it had experienced a moment of fear. In simpler terms, Mauricio observed that the market has bounced back strongly, and the downturn was more of a scare than an actual departure.

In crypto lending, clients transfer bitcoin or other digital currencies to firms such as Ledn. They can then earn returns on their deposit or utilize their crypto as collateral for loans. The interest paid to depositors results from the company’s practice of loaning out their crypto to others at a fee.

In 2022, the cryptocurrency market experienced a dramatic collapse, causing significant trouble for companies such as Celsius, BlockFi, and Genesis. These firms were forced to file for bankruptcy due to the plummeting crypto prices.

After experiencing a significant decline during the bear market, the digital asset sector has bounced back strongly. Prices have surged, with the CoinDesk 20 Index recording an increase of over 200% since the end of 2022. The upward trend gained momentum towards the end of last year when traditional finance heavyweights like BlackRock successfully launched bitcoin ETFs in the United States. This optimistic outlook surrounding these funds is believed to be a significant factor drawing investors back into the lending market, according to Di Bartolomeo from Ledn.

As a researcher studying the cryptocurrency market, I’ve observed an intriguing development: Bitcoin’s value has surged from $20,000 to an impressive $70,000. This significant price increase has ignited increased attention and interest in the U.S., even entering the political discourse. Consequently, it’s clear that there exists a robust demand for Bitcoin as a valuable asset and a potential collateral option for lending.

The majority of institutions involved in this sector are market makers, with many hailing from traditional Wall Street backgrounds and others being crypto-native companies. As Di Bartolomeo explained, “They are the firms active in Exchange-Traded Fund (ETF) markets as well as over-the-counter (spot) markets.” Some have built their reputations in the traditional financial sector, while others have gained prominence in the crypto industry.

Bankruptcy paybacks

A significant number of failed lending firms are repaying their users and re-entering the market, causing a surge in returns for some investors, as reported by Di Bartolomeo.

He reasoned that for many users, their belief in the growth of their investments, even during market declines, has been validated. These individuals were negatively impacted by unscrupulous actors but are now in the process of recovering their funds. According to Di Bartolomeo, these dedicated users are unlikely to sell and instead opt to engage in lending through the market.

He pointed out that the data indicates a strong preference among people to hold onto their bitcoin for an extended period, while simultaneously benefiting from it. For individuals with substantial bitcoin wealth, traditional financial institutions may not acknowledge their digital assets as collateral for loans. This is where companies like Ledn come in to fill the gap and provide such services to these customers.

Surviving crypto winter

As a crypto investor, I’ve noticed that while many centralized lenders went bankrupt during the crypto winter, Ledn managed to survive. The reason for this lies in their commitment to the core principles of lending and borrowing.

As a crypto investor, I’d explain it this way: Ledn ensures that all lending and borrowing transactions are matched in term length. For instance, if I lend an asset with a seven-day term, Ledn will match it with another user who can return the same asset within five days. This process maintains liquidity for assets by providing an avenue for short-term lenders to meet the borrowing demands of longer-term borrowers.

As an analyst, I would respond by saying: “Some criticized us for being dull and uneventful. However, we maintained that our approach, although perhaps perceived as slow and safe, was essential to achieving long-term success.”