It’s official: crypto lending has taken off. Instead of spending bitcoin and grappling with the tax implications, an increasing number of savvy individuals are opting to lend their coins in return for tax-free cash or crypto at attractive interest rates. Provisioning a percentage of your holdings for crypto-denominated loans is an increasingly popular way of generating passive income while you hodl, and the number of lending protocols has rocketed in the past 12 months, aided by comparison sites that facilitate shopping around for the best deal. You’ll certainly want to do so, since the APR offered to lenders differs wildly between coins and platforms.
Tapping into a major market
The cryptosphere once centered on little more than the trading of digital assets for speculative purposes. But in recent years that has all changed; now a white-hot economy populated by derivatives, smart contract-powered dApps, decentralized protocols, and an array of storage solutions and crypto networks, the ecosystem is more competitive and diverse than ever.
It was only a matter of time before financial institutions contemplated the amount of cryptocurrency in circulation – and the hesitancy of holders to liquidate their precious assets, especially at depressed prices – before deciding there was a market for crypto-collateralized loans that could be provided to trusted third parties such as institutional clients and investors (often to short assets).
Although the sector they envisioned has gathered a head of steam in the past year, the first crypto lending platforms actually originated following the ICO boom of 2017 – and it’s only taken a few years for the market to reach maturity.
The current state of crypto lending
From Dharma, BlockFi and Cred to Maker, Celsius and Binance, crypto lending platforms include established firms lending billions of dollars worth of loans as well as ambitious startups touting credit lines on multiple currencies at comparatively low interest rates. Some platforms even let users collateralize Steam Market gaming items in addition to crypto.
Crypto-secured loans now represent a $5 billion industry, and it’s little wonder given the stark difference in interest rates when compared to traditional banks. With crypto loans, earning a generous return is far more feasible than with traditional institutions. Take Cred as one example: the lender offers 10% returns on BTC, ETH, BCH and LTC, far higher than any bank (or rival crypto lender, for that matter.) Of course, traditional lenders won’t let you collateralize your crypto at all – but if the market continues to grow, that may change in the future.
This week, the Litecoin Foundation launched its own earning application powered by Cred, which suggests another direction the crypto lending space might take: community hubs that initiate lending-as-a-service under the wing of an accredited lending provider.
Research by blockchain firm Graychain Ltd highlights the rude health of crypto loans; during the first three months of 2019, over 5,400 new loans were issued, with the number rising to 18,500 in the second quarter. What’s more, the amount of value locked into decentralized finance (defi) protocols has just surpassed $1 billion, with around three-quarters coming from lending protocols.
Matching supply and demand
While such figures indicate a strong market, there is always the risk of depositor demand outstripping borrower supply; in this event, lending platforms may have to cut their interest rates. Crypto loans typically fall into two categories – fixed and variable. The latter generally applies to defi projects, whereby supply and demand dictate the actual rate that is offered. The greater the demand for a particular asset, the higher the interest rate is likely to be. Fixed interest rates, offered by crypto lending platforms such as Squilla Loans, protect the lender by locking in the rate they have been offered, even if the market goes down.
Borrowing against your bitcoin – or indeed any other supported cryptocurrency – lets you earn interest regardless of how the market moves; but it can also cause a headache. After all, you’ll need to decide between custodial and non-custodial platforms before scouring each provider’s T&Cs to ensure you can withdraw your funds when it suits. What’s more, you might want to make sure that the interest-paying periods meet your approval; generally they will be monthly, quarterly or paid on an annual basis.
Given the negligible transaction fees, attractive interest rates and preponderance of lending platforms, the popularity of crypto-backed loans is unlikely to diminish any time soon. As the industry evolves, crypto lending will open gateways to further cross-border and cross-sector lending, providing diversification to platforms and borrowers, while showing that crypto assets can provide genuine utility. The days when cryptos were only good for trading with other cryptos are over. The digital asset lending sector can take some credit for bringing about that change.