Despite the current bear market, a report by Genesis Capital reveals that digital asset lending has continued its uptrend through 2018
Launched in March this year, Genesis Capital is the lending arm of New-York based OTC cryptocurrency broker Genesis Global Trading. Borrowing cryptocurrency is required when an investor wants to short a digital asset or can be used for working capital purposes by blockchain companies, whereas the lending of cryptocurrency provides investors with interest on their "dormant" holdings as added profit.
After the six months of operation, the company has published a report on the state of the cryptocurrency lending market.
Who borrows and for what?
According to the report, the value of cryptocurrency borrowed through Genesis Capital reached over half a billion dollars in six months. Out of the $553 million transacted, $327m were loans, $226m were borrows, and $130m are still active loans. Nearly a dozen digital assets were involved in the transactions with 60+ counterparties globally.
Genesis Capital says its main clientele is composed of hedge funds and trading firms, who borrow for short periods to express their market views with short positions or engage in arbitrage trading, as well as companies who borrow for working capital purposes to grow their businesses.
What an increase in crypto lending means for prices
A regulated OTC digital asset lending service being actively used by a range of counterparties shows how cryptographic asset markets are maturing. Not only are hedge funds and proprietary trading houses borrowing to short bitcoin, ether and others, but digital currency startups are also using bitcoin loans in their working capital management.
An active digital asset lending market will likely entice more hedge funds and other "fast money" players to enter the crypto market, which could help to boost asset prices in the coming months and years. The most liquid assets, where lending is possible, will likely see an increase in trading volumes and potentially an increase in value as a result.
Small and mid-cap altcoins, on the other hand, will likely not see much lending activity due to their lack of liquidity – and correspondingly will be unlikely to see their values affected positively by a growing cryptocurrency lending market.
Crypto borrowing trends Q2-Q3
When Genesis’ lending desk started in March, the main assets being borrowed were bitcoin (BTC), ether (ETH), and monero (XMR).
Following market developments, which included a steep drop in ETH, borrowing demand for ether waned and ripple (XRP) and ether classic (ETC) became increasingly popular lending assets.
Bitcoin remained the most popular asset for borrowing and was primarily used for working capital in remittance companies as well as for exchange arbitrage trades.
Interestingly, while bitcoin was used more commonly for working capital needs, ether was primarily borrowed by short sellers. This echoes the market sentiment shared by many institutional crypto investors who said throughout the year that they considered Ethereum as an excellent short.
Despite Ethereum’s undeniable top spot as a platform for launching initial coin offerings – with around three quarters of ICOs being launched on the platform – and its first-mover advantage as a smart contract computing platform, many investors believe that competing platforms have learned from Ethereum’s scaling challenges to provide faster, more scalable computing platforms that will outperform their pioneering predecessor in the future.
Genesis Capital stated in its report: "Some of our largest single originations to date were ETH loans in March and May to hedge funds. Over the second half of the year, these hedge funds began covering positions as they realized profits and the short interest in ETH was replaced by other alternative assets."
Interestingly, some trading firms borrowed BTC to remain price neutral as the bitcoin derivatives market began to gain traction later in the year.
In the third quarter of 2018, borrowing moved towards altcoins such as BCH, XRP, ETC, and LTC, which helped to drive the price of these assets higher as supply was limited. Moreover, the BTC loan book also increased but its price was not affected as supply was sufficient to cover the borrowing demand in the OTC market.
Interest also increased in Q3 as hedge funds became more active both in short selling and in putting on leveraged long positions. Trading houses also increased borrowing to capitalize on exchange arbitrage opportunities and market-making as the derivatives market liquidity received a boost. Generally, trading houses will borrow cryptocurrencies to trade against crypto derivatives such as futures and swaps.