Is the bear market a boon to crypto lenders?

2017 was full of hope for blockchain startups, but in the following bear market many have struggled to deliver on their promises. One quiet corner of the crypto ecosystem, however, has continued to flourish.

Crypto lending platforms — which allow borrowers to put crypto down as collateral against loans — are reporting increased profits, and continuing with their expansion plans as the market remains depressed.

Without the constraints imposed by banks, these platforms reduce the cost of loans by lowering third party fees, make loans more accessible by removing the need for traditional credit scores, and allow both borrowers and lenders to benefit from a global pool of liquidity.

These factors have helped fuel growth, says CEO Stani Kulechov from crypto credit platform ETHLend, which made strides forward in 2018 despite the 88 percent drop of it’s ‘Lend‘ token.

"We have already gained a growing community of early adopters and our users love us because, contrary to [traditional] lenders, we provide a transparent marketplace (all data is stored on Ethereum blockchain), smart contracts (the users are able to repay loans even if the website is down) and we or anyone else cannot change the transactions," Kulechov says.

Bear market boon

Those unwilling to sell digital assets at depressed prices, and those wanting to profit from the downturn by shorting the market, are thought to be using these decentralized lending protocols to pay the bills while they wait for the bulls to return.

Kulechov suggests that much of the success of ETHLend — which he claims has experienced 50 percent growth in 2018 — is down to the bear market, as company activity is "closely tied with the market movements of cryptocurrencies". He says seasoned investors in need of quick cash have flocked to ETHLend and that the platform has reached monthly loan volumes that can compete with top peer-to-peer lending brands from the legacy financial system in Europe.

However, the extent to which the bear market itself is responsible for this borrowing is disputable — with tax optimization also thought to be a major motivation: "Cryptocurrency holders in many jurisdictions would prefer to borrow funds instead of selling their assets to avoid a taxable event," Kulechov says.

Institutional uplift

As the bear market bites, retail investors are not the only ones holding out for a rebound, and according to reports, institutions are also borrowing against crypto collateral.

Institutional-focused crypto lending platform BlockFi, for example, credits its success over the past year not to the bear market, but to institutional backing. Says BlockFi founder Zac Prince: "We grew despite the bear market, not because of it. Our loan products to date are primarily for crypto bulls — individuals and corporations who have a long position in crypto and want to get liquidity against it without selling.

Price declines are a net negative for that product but we grew despite the down trend because we were bringing a new product to the market that wasn’t there before – and we did it with really strong institutional backing which creates trust."

Mike Novogratz’s Galaxy Digital and Fidelity subsidiary Devonshire Investors have both invested in BlockFi, and the company claims to have grown "10X in loan book size, revenue and customers over the last six months of the year". Other institutional platforms, like Genesis Global which offers OTC trading, have also reported staggering loan volumes: Genesis claims to have lent over $550 million since March to institutions looking to take short positions and hedge their investments.

Regardless of the cause, the success of crypto lending platforms suggests a significant gap is being filled in today’s crypto asset market. This is mirrored by the success of p2p lending platforms serving the legacy financial market, which are expected to grow at a rate of almost fifty percent over the next few years.