A Closer Look Into the World of Cryptocurrency Borrowing and Lending

Kelly Pettersen, Head of Business Development at Lendingblock


Observers of the evolving digital asset markets will have noticed the increasing prevalence of lending, which comes in a growing number of varieties.

While many may assume that all crypto lending is the same, it is helpful to look at who borrows (for example retail or institutional), for what purpose (for example, for capital management or for yield), or indeed how the business is conducted (for example, centralised, decentralised, or manually).

Just as mortgages, trade finance, and securities lending are vibrant and vital forms of lending with no overlap, it is evident that there is space for more than one type of digital asset lending.

Let’s look at the development of the loan market and the key types of players offering products and services today:

Over-the-Counter Market

The OTC loan market can be defined as a market that has been created through a network of institutional type firms that exchange (borrow, lend, buy and sell) crypto off-market between each other.

The terms of these transactions are agreed upon between both counterparties (i.e. asset, price, collateral, term) and deals are usually for quite significant amounts of crypto. Counterparties communicate and trades are usually negotiated through skype, telegram and email. Facilitating these trades off-exchange also means that the transaction does not move the market.

Despite market volatility, the OTC loan market specifically has continued to see a steady growth rate. According to Genesis Global Trading, loans originated have reached nearly $750 million which has increased 75% percent from their previous quarter and outstanding loans have increased 149% to $452 million.

Retail Lenders

There are a variety of crypto firms that are providing lending services to the retail market. These companies all over somewhat similar services:

  • USD or stable coin loans collateralised by various cryptocurrencies
  • crypto loans collateralised by USD
  • a service whereby retail investors can hold crypto in the company’s cold storage wallet and generate an interest on their holdings, so their assets are working harder for them

The retail crypto fiat loan market has grown exponentially over the past year. In May, Celsius’s Alex Machinsky had highlighted that they have $1.2 billion of crypto on deposit and $400 million on loan. Loans outstanding are only £52 million less than what Genesis’s OTC desk reported for Q2, 2019. BlockFi has also commented that as of April, 2019 it has $53 million of crypto on deposit.

Margin Lending/ Levered Lending

Margin lending lets investors borrow an asset to invest but uses a different asset as security on the loan.

Ultimately, borrowing on margin can help one increase returns which can be very attractive for an investor. It also though can substantially increase risk which in turn could magnify the losses. There are many exchanges and providers offer leverage on loans. For example, Bitfinex offers 100x leverage, whereby Kraken offers 5x leverage.

A trader therefore could go to Bitfinex and get up to 100x their funds as long as a certain amount of collateral is held against the leverage to provide some level of certainty. This is usually around 20-30% of the principal amount. On the hand, makers are offered relatively favourable interest rates on their funds they are willing to lend.

Lending Exchange

While there are multiple ways to make and take crypto loans, there is no common thread that provides a seamless way for professional market participants access the loan market and gain true price discovery on a global scale.

Lendingblock is a company that is positioning themselves in this untapped space and providing the infrastructure that will propel the growth and development of digital asset lending forward. They are said to be ‘reinventing conventional securities lending for digital assets.’

Institutional participants such as OTC providers, retail lenders, banks, market makers, hedge funds, and trading firms can benefit from borrowing and lending cryptocurrencies at scale through Lendingblock’s regulated exchange as lending infrastructure starts to bolster.

The automated exchange offers multiple markets (i.e. BTC 30 day loan market or ETH 14 day loan market) across a number of digital assets and stable coins for arbitrage, short selling, working capital purposes and managing inventory, amongst other strategic needs.

Investors can also use Lendingblock’s risk free lending yield curve as a data point to evaluate true price discovery of key assets.

The exchange is scalable and will be able to fill some of the voids that people are currently facing around access, driving market efficiencies and the constant search for liquidity. Lastly, Lendingblock’s legal framework and settlement structure may even set the basis for a global institutional market standard in crypto.

Mature capital markets provide important support for economic development, with a wide range of financial products allowing effective risk management tools, efficient access to funding, and the ability to be able to execute sophisticate trading strategies.

These products depend on the ability to be able to buy or sell large positions quickly, easily and with minimal impact on the market – aka liquidity.

One of the critical contributors to liquidity is securities lending, or the ability to borrow and lend assets. Just as stock borrow loan (SBL) and repurchase agreements (repo) support efficient equity and debt markets, borrowing and lending of digital assets is critical to the growth of our markets, and Lendingblock is pleased to be at the forefront of this development.