10 Mar 2021

The institutions are entering the lending market

The growth in the crypto lending market has been extraordinary over the past year, and 2020 has seen billions of dollars from institutions being deployed in the lending market.
Active BTC Collateral in the Lending Market
The institution-focused company Genesis saw YoY growth of 245% in their outstanding loans. Our estimation shows that over 400,000 BTC could already be in use as collateral in the lending market today. The lending market for bitcoin is young but rapidly growing. The first companies in this sector launched their offerings only four to five years ago. This has now become a billion-dollar industry and an essential part of the overall bitcoin market. However, this is not surprising when we see how massive the lending activity in traditional markets is. Collateralized loans are seen everywhere, from mortgages and cash loans to the enormous repo market with overnight lending.There are numerous reasons for using bitcoin as collateral for loans. The most common are leveraging up on existing crypto positions, arbitrage plays, market-making and covering operation costs without selling any holdings.
Total active collateral grew by 1170% from Q3 2019 to Q4 2020
The extensive efforts from Credmark, the market-leading crypto credit data company, show that the lending market has seen a sharp rise over the past year. From Q3 2019 to Q4 2020, the total active collateral in the lending market grew by 1170%.Total Active Collateral in the Lending Market
Total Active Collateral in the Lending Market
420,000 bitcoin used as collateral
The numbers from Credmark give us the approximate size of 420,000 BTC used as collateral in various loans in the lending markets, with a growth of 213,000 BTC from Q4 2019 to Q4 2020. The approximate size is based on a modest estimate of 50% of active loans being backed by bitcoin collateral. In reality, this is likely to be an underestimation, as several industry experts assume that the correct estimate is closer to 70% or 80%.Active BTC Collateral in the Lending Market (Under Various Assumptions of BTC share of collateral)
Active BTC Collateral in the Lending Market
Incredible growth in 2020 for Genesis
Genesis is one of the market-leading companies in the lending market with its institutional-focused business. They have seen incredible growth over the past year, and their outstanding loans surged to $3.8 billion in the fourth quarter of 2020, a roughly 80% growth from Q3.Genesis - Active Loans Outstanding
Genesis - Active Loans Outstanding
The company processed almost $20 billion on loans in 2020 to institutions only, showing tremendous demand for traditional actors entering crypto lending. In Q4, the company pointed to the inflow of institutional lenders as well. Ultra-high-net-worth individuals, corporations, traditional hedge funds, and family offices wanted to enter the market for the first time and were looking to generate excess yield on idle cash. There is clearly significant demand for liquidity in the crypto market.
Growing demand for ETH among institutions
Although the demand for cash is clearly present, only 23.2% of Genesis' loans outstanding in the fourth quarter were USD and equivalents. The chart below shows the 2020 loan portfolio composition for Genesis.Genesis - 2020 Loan Portfolio Composition
Genesis - 2020 Loan Portfolio Composition
As seen above, 53.9% of all active loans from Genesis are in BTC. A substantial increase from the third quarter, when only 40.8% of loans outstanding were in BTC. However, Genesis points toward the price appreciation of bitcoin and hence its impact on its share of outstanding loans as the main reason.However, the most exciting development of 2020 was the steady increase in ETH loans outstanding. After ending Q1 at 5.5%, the share of ETH loans outstanding grew 177% over the next three quarters, ending the year at 15.5%. Of course, some of this growth is attributable to ETH's price inflation. Still, a significant part of these newly issued loans was tied to in-kind placements in Grayscale's Ethereum Trust, according to Genesis.
Over $4 billion in outstanding institutional loans for BlockFi
Another market-leading lending company that most readers probably are familiar with is BlockFi. The company launched in 2017 and has become one of the industry's biggest names, cleverly combining a traditional finance approach with the new possibilities of crypto finance. BlockFi's internal numbers, shared with Arcane Research, show that the company is a clear competitor to Genesis on the institutional side. In 2020, BlockFi processed $18.6 billion in loans to its institutions and private clients. The company had $4.4 billion in outstanding institutional loans by the end of 2020, and according to David Olsson, VP, Head of Institutional Distribution at BlockFi, they expect the growth to continue in 2021:
“As traditional investment firms continue to adopt digital asset strategies, there is a huge vacuum in lending, which will need to be filled by efficient capital providers. We also expect further regulatory clarity globally in 2021, which will help ease any remaining institutional concerns about investing in the space.” - David Olsson, VP, Head of Institutional Distribution at BlockFi
These clients are not just based in the U.S. but spread across the world. As seen in the chart below, 60% of BlockFi’s institutional clients are based in the U.S, 25% in the Asia-Pacific and the last 15% are based in Europa.BlockFi Institutional Clients
BlockFi Institutional Clients
BlockFi has a valued offering among retail investors, where individuals can earn interest on deposited cryptocurrencies, with 6%-8% interest rates. Customers can also borrow USD or stablecoins against BTC, ETH or LTH and exchange between these assets and stablecoins when needed.As seen in the chart below, BlockFi's internal numbers, shared with Arcane Research, show that the growth for BTC-collateralized loans has been remarkable over the past years, both in USD and BTC terms.BlockFi - Retail Loans BTC Collateral (USD and BTC)
BlockFi - Retail Loans BTC Collateral
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