Bear Market Is Helping Crypto Lending Businesses to Prosper

On Wednesday (2 June 2019), Bloomberg reported that while "a growing number of cryptocurrency ventures struggle for funding" in the current bear market, crypto lending businesses seem to be "thriving" rather than suffering.

Crypto lending businesses that primarily focus on the needs of individual HODLers (who might need a loan, for example, to buy a car or pay their taxes), such as Salt Ledning, allow you to borrow fiat currency (usually USD) or fiat-backed stablecoins using your crypto as collateral, while others, such as Genesis Capital , that mainly focus on institutional borrowing, can lend crypto (against fiat).

The Bloomberg report says that these lenders are saying that "they’re finding strong demand from borrowers who don’t want to sell their virtual coins at depressed prices, as well as from big investors eager to borrow coins for short selling." Here are three examples:

  • " BlockFi says its revenues and customer base have grown 10-fold since June, when Michael Novogratz’s Galaxy Digital Ventures invested $52.5 million."
  • "Aave, which owns online crypto-lending marketplace ETHLend , just opened an office in London, plans to enter the U.S. soon and is nearing profitability."
  • " Salt Lending , which already employs 80 people, said it’s hiring more every month as its revenue ticks higher."

Bloomberg says that, initially, crypto lending startups, most of which were reportedly launched in 2017, were "offering enthusiasts a way to borrow cash without having to sell down their stockpiles of Bitcoin or other crypto assets they believed would soar even higher," but after "prices crashed in 2018," they "pivoted into new roles and continued to flourish," and this type of crypto business may in fact "fare even better in bad times than good."

Michael Moro, the CEO of Genesis Capital, told Bloomberg in a phone interview:

“The bear market has certainly helped -- at least has fueled the growth... We’ve been profitable from day one... We’ve certainly proven that there is market demand, that there’s product fit and that it’s time to invest even more in this side of the business.”

Moro also said that Genesis Capital "has already issued $700 million of loans" and that it currently has "about $140 million in loans outstanding with an average duration of six weeks." Apparently, Genesis is planning "to more than double its staff in the coming year to as many as 12 people, and it’s looking at growing in regions such as Asia."

Their loan terms are a follows:

  • "Minimum loan size is $100,000"
  • "Fixed durations from two weeks to six months"
  • "USD collateral accepted to back loan"

Bloomberg says that Genesis "typically requires customers to deposit around $1.2 million in fiat to take out $1 million of crypto," and that if an institution wishes to borrow Bitcoin, for example, it is charged "an annual rate of between 10 percent and 12 percent."

According to Bloomberg:

  • Businesses that accept crypto as collateral for fiat cash loans "usually demand much larger buffers to ensure they don’t get burned by falling prices." For example, Zac Prince, the CEO of BlockFi, told them that his firm "typically requires customers deposit $10,000 of digital coins to take out $5,000 in fiat."
  • When the price of the crypto collateral falls, "customers face margin calls, often starting with a warning that their holdings may be sold off soon." In the case of BlockFi, "margin calls are triggered if the price of the crypto collateral falls by 35 to 60 percent from the time the loan was granted," and approximately "20 percent of the startups’ loans faced margin calls last year."

BlockFi says this is what happens if the value of your cryptoassets significantly change during one year term of the loan:

"If the value of your coins significantly increase then they are kept in storage until the loan is paid. If your coins significantly decrease then that sets off a trigger event, and you will have to add more collateral to your account to maintain a minimum LTV ratio. You can use the value of your cryptoassets stored with BlockFi to make principal and interest payments at anytime. We plan to add the ability to draw more USD funds in the event of price appreciation over time."

And here is how BlockFi defines a trigger event :

"A trigger event happens when the value of your collateral drops and thus increases the LTV of your loan. The first trigger event occurs at a 70% LTV, which would require a 50% drop from the price at loan initiation. At this point, you have 72 hours to take action by positing additional collateral or paying down the loan balance. We will keep you informed if your LTV starts to near the 70% mark so you can take action preemptively."

One happy customer of BlockFi is Angela Ceresnie, the CEO of Climb Credit . She says:

"The ability to get liquidity on my significant Bitcoin and Ethereum holdings, without selling them, is something that I was looking for and found with BlockFi. For long term holders like myself, the tax benefits alone make the value proposition a no brainer."

Featured Image Credit: Photo via Pexels.com

CZ Explains How Binance Dealt With Aftermath of $40 Million Theft

On Sunday (May 19), Changpeng Zhao (aka "CZ"), the Co-Founder and CEO of digital asset exchange Binance, told the crypto community what he and his team had been up to since the May 7 security breach that resulted in a theft of over 7,000 BTC from their Bitcoin hot wallet. 

What Happened on May 7?

According to CZ, the hackers involved in the security breach somehow managed to get control over a number of user accounts and structured large withdrawals from these accounts in such a way thay managed not to be detected/noticed by Binance's "pre-withdrawal risk management checks." Their "post-withdrawal risk monitoring system" only noticed something was wrong after the hackers had moved the stolen BTC off of the exchange via a single transaction, at which time it immediately suspended all "subsequent withdrawals." 

At first, the Binance team was not exactly sure what had happened, and so they decided that the safest course of action was for CZ to send out a tweet to say that the "withdrawal servers" were in "unscheduled maintenance mode" while the team was investigating the incident. 

Communication With the Crypto Community

Once the team had confirmed that the exchange had been hacked, information about the security incident was broadcast to the outside world via all of Binance's communication channels (such as Telegram, Twitter, and Medium). 

Since the team could not be sure which user accounts the hackers had access to, it was decided that it would be too risky to allow further withdrawals to be made until the team had the chance to make "significant changes" to the platform (to make it more secure). Binance's announcement on May 8 estimated that the exchange needed to do "a thorough security review" and estimated that this would take about "ONE WEEK," and that during this period, "deposits and withdrawals" would need to "REMAIN SUSPENDED."

By being fully transparent in their communication with Binance users, they were able to receive "tremendous support" from them.

CZ's Periscope AMA Session on May 8

Seeing CZ live put much of the Binance community "at ease." Unfortunately, because CZ had been up all night, he was not in an ideal mental state when he did the AMA. Just before the AMA, his team told him that a Bitcoin Core developer had suggested that it would be technically possible to roll back the single Bitcoin transaction carried out by the hackers by "hugely incentivizing the miners." CZ made the unfortunate mistake of mentioning this "reorg" idea (which he now realizes is a "taboo topic") during the AMA, for which he took a heavy beating (especially from hardcore Bitcoin maximalists) on Twitter (and elsewhere). 

CZ's Mental State Right After Being Told About the Bitcoin Theft

Although he was in a "F***, F***, F***” state" for around 10 seconds, a few moments later, he "began to come to terms with it," and a quick mental calculation told him that the theft of around 7000 BTC (equivalent of around $40 million at the time) could be fully covered by their SAFU fund. Meanwhile, his team had already gone into "War Mode", and their professionalism and support cheered up CZ. 

Support From the Crypto Community

Binance received support from many sources: people defending him and Binance on social media platforms, and helping to answer questions; the Binance Angels (who are all volunteers) "addressing questions" and "reassuring" users on "multiple communities"; analytics firms helping with the tracking of the stolen funds; exchanges and wallet services offering to help by blocking "any deposits associated with the hacker addresses"; and "numerous offers for help from law enforcement agencies around the world."

A Blessing in Disguise?

"Speaking with various team members, and as correctly analyzed by community members, such as Gautam Chhugani, this incident may actually be a good thing for us in the long run. Security is a never-ending practice. There are always more things to do in security, and we have implemented many of them in this last week and will continue to implement more in the future. Given this incident, Binance has actually become far more secure than before, not just in the affected areas, but as a whole."