As a seasoned crypto investor with a decade of experience in this wild and unpredictable market, I must say that the recent surge of Bitcoin to over $100,000 has brought about a renewed energy within the long-struggling DeFi lending sector, a sight that brings both excitement and caution. The skyrocketing funding rate and increased demand for Bitcoin-backed loans suggest that the tide may be turning for this critical segment of the market.
The dramatic increase in Bitcoin‘s value, reaching over $100,000 for the first time ever, is causing a stir in the troubled world of crypto lending, notably within the realm of Decentralized Finance (DeFi) platforms.
As reported by Bloomberg, the buzz and anticipation about Bitcoin has not only boosted its trading activity but is also influencing peer-to-peer lending platforms. This trend could indicate a possible revival for the essential lending sector within the cryptocurrency industry.
Bitcoin Funding Rate Soars Tenfold
Data from Bloomberg indicates that the funding rate for Bitcoin, which is the cost traders incur to keep long positions open in perpetual futures contracts, has experienced a dramatic rise in November. This increase is over ten times greater compared to early June levels.
This rise indicates an expanding desire for investment with leverage, as Bitcoin’s worth has over doubled this year, fueled by optimism about the cryptocurrency’s growing acceptance in mainstream financial systems during the upcoming Trump presidency.
It’s quite remarkable that the cryptocurrency lending industry is bouncing back, considering its rocky history. In 2022 and the beginning of 2023, several lending platforms encountered considerable obstacles. Many companies in this sector declared bankruptcy due to suspect lending procedures.
Indeed, fresh statistics show a significant surge: Crypto lending activities have approximately tripled in the initial nine months of 2024 versus the last year. Yet, it’s worth noting that this activity has yet to reach the heights seen in 2021.
The need for loans backed by Bitcoin has significantly increased, as those who owned it previously are looking to capitalize on their holdings for large purchases such as homes and cars, according to Mauricio Di Bartolomeo, co-founder of Ledn, a crypto lending platform. He pointed out that many new investors are using their assets as collateral for long-term investment opportunities.
Crypto Lending Sector Revives
In the world of cryptocurrencies, lenders are vital players as they offer liquidity and help with transactions in a rapidly fluctuating market. Yet, conventional banks have shown reluctance to offer loans to those involved in the crypto market because of lingering regulatory doubts.
During this time of separation (or gap), crypto lending platforms have experienced significant growth, especially during the bustling 2021 cryptocurrency market. Notable companies such as Genesis and BlockFi emerged as crucial providers of loans to investors.
The lingering effects of past missteps are evident, as demonstrated by Alex Mashinsky’s recent admission of guilt for fraud charges, being the co-founder of the collapsed Celsius Network in 2022. This defunct company left over $1 billion in debt and a complicated bankruptcy proceeding to resolve creditor claims.
Although there’s been a resurgence in lending activity, the current levels are still substantially lower compared to those seen in 2021. As reported by Galaxy Research, the combined volume of lending through DeFi applications and centralized providers reached about half of what was recorded during the first nine months of 2021, amounting to $36.8 billion – a threefold increase from the same period in 2023.
Decentralized Finance (DeFi) platforms are attracting significant attention, with a staggering $31 billion in loans compared to just $5.8 billion managed by traditional, centralized providers. This trend is evident when looking at the total value locked in Ethereum lending applications, which has now surpassed its 2021 high, as suggested by data from DeFiLlama.
As an analyst, I’m mindful that market leverage is escalating, yet a degree of caution persists. Many market players continue to tread cautiously in lending, a residue of the upheaval during the last cycle when certain lenders extended unsustainable double-digit returns on unsecured loans. This memory of turmoil lingers and influences their current approach.
Specifically, institutional lenders are adopting a more cautious stance. Notably, Jeffrey Park, a portfolio manager at Bitwise Asset Management, mentioned that earlier they used to provide loans to crypto lending companies, but have since ceased this strategy following a decrease in client demand for high-risk investment options after the FTX collapse.
Nevertheless, certain centralized trading platforms and intermediaries are moving to cover the gap in lending. For instance, Galaxy Digital has seen a 20% rise in its loan portfolio since mid-August, averaging around $863 million during the third quarter.
At the time of writing, BTC was trading at $99,130, up 1.5% in the last 24 hours.
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2024-12-08 12:12