In a rather unexpected turn of events, the crypto-lending industry that nearly met its demise during the last major bear market is making a comeback. A new breed of creditors is stepping up to fill the gap left by the downturn, providing the market with a much-needed infusion of debt. This resurgence of lending is prompting a flurry of activities in the market, from leveraging bets to providing the liquidity needed for trading.
Traditional banks and crypto-native firms are among those that have either started or are in the process of providing capital. This month alone, Cantor Fitzgerald, the financial-services firm previously led by U.S. Commerce Secretary Howard Lutnick, has initiated a Bitcoin financing business with an initial capital of $2 billion. In a similar fashion, Bitcoin software firm Blockstream Corp. has secured a multi-billion dollar investment in its crypto lending funds. Additionally, crypto wealth manager Xapo Bank has begun offering Bitcoin-backed loans up to $1 million.
David Mercer, chief executive of the institutional trading platform LMAX Group, predicts a more institutional nature for the emerging lenders. He believes that more banks will enter the space and provide credit mechanisms to some of the most significant institutions to trade these assets.
A brief history of crypto lending
Leading up to the 2021 market bull run, crypto lending saw a significant surge with the advent of native lenders such as Genesis Global Capital, Celsius Network, and BlockFi. These firms, however, underwrote unsecured loans to hedge funds or exchanges that went bust, partly due to a drop in crypto prices. This led to a decrease in liquidity and access to the capital markets, as all three firms eventually filed for bankruptcy.
As a result, the crypto industry faced a liquidity shortage, as there were few entities willing to provide leverage. Rob Hadick, a general partner at crypto venture firm Dragonfly, notes that the dearth of expertise in risk-managing crypto has posed significant challenges.
The future of crypto lending
Despite these challenges, industry insiders believe that crypto lending is poised for significant growth, with more traditional institutions now open to participating. This shift is in part due to the supportive policies and regulations of U.S. President Donald Trump. As more traditional lenders become comfortable with the current administration, legislation, and regulators, Bitcoin-backed loans could be supported by larger balance sheets and more evolved risk-management mechanisms.
However, as the demand for such services grows and more crypto-friendly policies are adopted, credit risks remain a significant challenge for an asset class known for its high volatility. Austin Campbell, adjunct professor at New York University’s Stern School of Business and the CEO of stablecoin company WSPN USA, remains skeptical that crypto natives can spontaneously invent centuries of credit lessons. He believes it requires expertise from outside the industry to come in.
This story was originally featured on Fortune.com
