The last major bear market nearly wiped out the entire crypto-lending industry. Now, it’s staging a major comeback, with a new breed of creditors looking to step into the void and satisfy the market’s perennial appetite for debt.
Lenders ranging from traditional banks to crypto native firms have either begun or are in the process of providing capital, facilitating an uptick in a range of market activities from amplifying bets with leverage to providing short-term liquidity needed for trading.
This month alone, Cantor Fitzgerald, the financial-services firm previously led by U.S. Commerce Secretary Howard Lutnick, kicked off its global Bitcoin financing business with initial capital of $2 billion. Meanwhile, Bitcoin software firm Blockstream Corp. secured a multi-billion dollar investment in its crypto lending funds. And crypto wealth manager Xapo Bank began offering Bitcoin-backed loans up to $1 million.
“The new lenders will be much more institutional in nature,” said David Mercer, chief executive of the institutional trading platform LMAX Group. “More banks will enter the space and provide credit mechanisms to some of the largest institutions you can imagine to trade these assets.”
Crypto lending surged in the lead up to the market bull run in 2021, with the rise of native lenders such as Genesis Global Capital, Celsius Network and BlockFi. Those firms ended up underwriting unsecured loans to hedge funds or exchanges that blew up, due in part to a plunge in crypto prices. All three subsequently filed for bankruptcy, leaving traders, prime brokers and market makers with much less liquidity and access to the capital markets.
Risk-management challenges
“There haven’t been a lot of people willing to give leverage, all the undercollateralized lending went away,” said Rob Hadick, general partner at crypto venture firm Dragonfly. “There are not many people, if anyone, that are good at understanding how to risk-manage crypto. It has been quite a bit of an issue for a lot of people.”
Crypto exchanges, prime brokers and market makers sought to help fill the void in the absence of industry-native lenders and traditional financial institutions that were willing to lend to crypto firms, in part because of the crackdown on the sector during the Biden administration.
“With the new administration, I think that regulators will have a more reasonable regime and approach and perhaps the banks will get more involved,” said Bitstamp U.S.A. CEO Bobby Zagotta.
Bitcoin-backed loans have been one of the more common options for crypto firms to source cash and boost short-term liquidity. However, traditional financial institutions such as banks have still steered clear given the high volatility that comes with the cryptocurrency while it serves as collateral.
“The majority of the demand for borrowing today in digital assets is around cash,” said Adam Sporn, head of prime brokerage and U.S. institutional sales at BitGo. “It has been a constraint because you don’t have any large banks that are lending into the space.”
Trump effect
Industry participants say crypto lending is poised to grow to an even larger scale with more traditional institutions now open to getting involved because U.S. President Donald Trump is supporting policies and regulations that are favorable to the sector.
“We have seen excitement from more traditional lenders as they have gotten more comfort from the current administration, legislation and the regulators are going to allow them to do that,” Dragonfly’s Hadick said.
That could lead to Bitcoin-backed loans that are supported by larger balance sheets and more sophisticated risk-management mechanisms at traditional financial institutions, Mercer of LMAX said.
So far, crypto lending has come back in a more conservative fashion with lower loan-to-value ratios, meaning borrowers are required to make larger down payments to reduce lending risks.
“There is still not a lot of interest in undercollateralized loans yet,” Hadick said. “If you can get undercollateralized lending for prime brokers, trading desks and other institutional counterparties, that will improve liquidity and the general function of the market.”
While growing demand for such services coupled with a more crypto-friendly administration have paved the way for another boom in crypto lending, credit risks remain a key challenge for a nascent asset class that is known for its high volatility.
“I remain skeptical crypto natives can spontaneously invent hundreds of years of credit lessons and instead think it requires expertise from outside the industry coming in,” said Austin Campbell, adjunct professor at New York University’s Stern School of Business and the CEO of stablecoin company WSPN USA, noting he is more optimistic on traditional institutions’ involvement.
