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According to a recent Bloomberg report, the crypto-lending industry, which faced near extinction during the last major bear market, is now experiencing a significant resurgence.
A new wave of creditors is stepping into the void left by previous failures, aiming to meet the ongoing demand for crypto-backed loans and leverage in a recovering market.
New Era For Crypto Lending?
In recent weeks, several prominent players have made headlines with initiatives aimed at revitalizing crypto lending. Notable developments include Cantor Fitzgerald, the financial services firm formerly led by US Commerce Secretary Howard Lutnick, which has launched a global Bitcoin (BTC) financing business backed by an impressive $2 billion in initial capital.
Similarly, Bitcoin software firm Blockstream Corp. has secured a multi-billion-dollar investment for its crypto lending funds, while crypto wealth manager Xapo Bank has begun offering Bitcoin-backed loans of up to $1 million.
David Mercer, CEO of the institutional trading platform LMAX Group, commented on this shift, stating, “The new lenders will be much more institutional in nature. More banks will enter the space and provide credit mechanisms to some of the largest institutions you can imagine to trade these assets.”
This transition marks a significant departure from the previous era dominated by crypto-native lenders such as Genesis Global Capital, Celsius Network, and BlockFi, all of which collapsed after underwriting unsecured loans to hedge funds and exchanges during a market downturn.
Volatility Keeps Traditional Lenders At Bay
In the absence of traditional financial institutions willing to lend, crypto exchanges, prime brokers, and market makers have sought to fill the liquidity gap. The regulatory environment, particularly under the Biden administration, also influenced the dynamics of crypto lending.
Bobby Zagotta, CEO of Bitstamp USA, expressed optimism about the changing regulatory landscape, suggesting that “regulators will have a more reasonable regime,” potentially encouraging banks to engage with the sector.
Bitcoin-backed loans have emerged as a popular option for crypto firms seeking to bolster short-term liquidity. However, traditional banks remain hesitant, primarily due to the volatility associated with cryptocurrencies as collateral.
Adam Sporn, head of prime brokerage and US institutional sales at BitGo, remarked, “The majority of the demand for borrowing today in digital assets is around cash,” emphasizing the constraints posed by the lack of large banks willing to lend in this space.
Interestingly, Bloomberg reports that industry participants believe that the current political climate, particularly the support from President Donald Trump for favorable policies and regulations, has contributed to a renewed interest from traditional lenders.
Despite the optimism surrounding the revival of crypto lending, the industry is proceeding with caution. Current lending practices involve lower loan-to-value ratios, requiring borrowers to make larger down payments to mitigate risks.
While the growing demand for crypto lending services and a more favorable regulatory environment suggest potential for another boom, experts caution that credit risks remain a significant concern.
Austin Campbell, adjunct professor at New York University’s Stern School of Business and CEO of stablecoin company WSPN USA, expressed skepticism about the ability of crypto-native entities to replicate centuries of credit lessons without external expertise.
Featured image from DALL-E, chart from TradingView.com
