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Crypto Lending Offers Less Than 2% Returns

by Pragati Shrivastava

The crypto lending industry has taken the world by storm in 2019, and cryptocurrency-based loans amount to $4.7 Billion so far, but according to Graychain’s report on collateralized digital assets in the lending industry, only $86 Million has been earned through interest this year. That’s less than 2% in returns. What’s going on?

Lenders have not earned significant profits as loans are being opened and closed too frequently. The bear market leads to job cuts at many firms in the nascent ecosystem, but lending businesses continue to expand, according to Bloomberg’s report. Crypto lenders are in a unique position in the bear market and they can increase demand for their services. The market conditions have certainly fueled their growth.

Private companies like Genesis can make money, lending to investors looking to short bitcoin as well as to bitcoin “HODLers” who don’t want to spend their crypto at depressed prices. Genesis has plans to expand to Asia in 2019. Another lending firm – BlockFi, reportedly grew its revenues and customer-base 20-fold since June 2018.

Borrowed assets have an interest rate of 6-8% while the amount paid in interest is a little over 1.8%. The crypto lending sector appears to be more prominent due to the huge orientations that lending companies are doing. Lending companies are issuing short-term loans. Loans are issued quickly and then closed, and lenders earn very little because the lending period is too short for generating significant interest payments. Companies like Compound, dYdX, MakerDAO and Nuo are leading private lenders. Over 65% of the originations are from private companies like Celsius and Genesis.

The performance of the lending industry depends on the interest collected. In the second quarter of 2019, loans issued surpassed $150 Million. Though returns are not substantial yet, research has suggested that there is a high demand for the business. An increasing number of people are trusting private companies with their assets and the demand for this is increasing quickly.

During Q1 of 2019, over 15000 crypto loans were issued and the total amounts to $64.8 Million. For Q2 it amounts to $159.3 Million. A bulk of the borrowing has been made by private lenders who offer better percentage returns. Many of the borrowers from private companies borrow to avoid triggering a taxable event and make a bet on a token. They wait and let it play out and pay off the loan as soon as the short-term bet has played out. According to the report, the number of loans originated grew faster than the new addresses and the borrowed amount. This indicates old borrowers coming back for borrowing frequently, rather than borrowing millions at a time. Crypto-backed lending is likely to explode over the next few years in developing economies. In developed economies, it depends on regulation. The sector needs a regulatory nod to flourish.

When it comes to developing nations with mid-sized economies, the offering has the most potential. However, there’s a lot of investment needed to enter these markets and a lot of education needed to demonstrate to people locally the benefit to them of cryptocurrency. Private lending companies with a plan and the capital to execute this are scaling their operations and closing funding rounds faster than in 2018. With a global customer base, additional staff will be needed to deliver services smoothly and seamlessly. Crypto-backed finance is only in its nascent stage. However, it seems that it is here to stay and will play a pivotal role in the cryptocurrency ecosystem and the world economy.

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[…] slowly see the rise of the crypto lending wars. Institutions ranging from BlockFi to Celsius, and from general decentralized finance options […]

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