BlockFi is proud to be a market-leader driving the crypto financial services movement in the crypto ecosystem. A major element of the sudden attention on this market sector has been the shift in attention solely focused on technology, to a customer-focused perspective that works toward making crypto more approachable to the average consumer.
As part of this conversation, it’s important for consumers to get familiar with how lending products work and what the markets are that facilitate the favorable rates companies like BlockFi offer to their clients.
Why Do We Lend Crypto?
At BlockFi, we enable clients to earn a yield on their crypto by lending to certain institutions. Our growing industry of entrepreneurs, traders, and institutions are looking to borrow cryptocurrencies so that they can build their businesses without exposing their dollar denominated balance sheets to the volatility of the crypto markets. Therefore there is a natural business opportunity in connecting investors to borrowers.
Who Borrows Crypto?
BlockFi works with institutional counterparties for trading and lending cryptocurrency. These counterparties look to us to help them provide liquidity for their businesses. But who are some of these borrowers?
- Traders and investment funds who see a fragmented marketplace and discover arbitrage trading opportunities. Arbitrageurs need to borrow crypto in order to close mispricing between exchanges or dispersed markets. Similarly, margin traders need to borrow in order to execute their trading strategies. This is a simple example, but it demonstrates how arbitrage and margin trading activities facilitate price discovery, which is an essential component of developed markets.
- Over the counter (OTC) market makers make money by connecting buyers and sellers who do not want to transact over public exchanges. OTC desks need to keep inventory on-hand to meet their client demand. Owning crypto outright is capital intensive and comes with the attendant risks of price fluctuations. Instead, they may prefer to borrow inventory in order to facilitate transactions. Liquidity is another essential component to healthy markets.
- Businesses that require an inventory of crypto to provide liquidity to clients. This bucket includes companies like crypto ATMs. These businesses also need to be able to support withdrawals while keeping the vast majority of their crypto assets in cold storage. The liquidity we provide them helps with these basic and important functions.
The BlockFi Team can draw on over 30 years of combined traditional finance and banking experience to create a robust on-boarding and credit risk underwriting process for institutional counterparties. The results of our underwriting help us assess our counterparty’s credit profile and enables us to make informed decisions on pricing, deal terms, and counterparty borrowing limits. BlockFi’s goal is to safeguard client funds by working with a diversified group of creditworthy counterparties. Every deal we make is monitored 24/7 by our automated risk management system, which has the ability to automatically issue margin calls to ensure the health of the trade.
Crypto Lending Market Conditions
In the year since we entered the crypto lending market, there are a number of things we learned fairly quickly: many market participants are highly sophisticated and well capitalized, trades happen at relatively high frequency, and there is way more demand than one would expect. However, some markets are healthier than others.
The Bitcoin lending markets are vibrant and continue to grow month over month. We’ve found that the demand for BTC over the last year has increased over time and we’re constantly finding new parties to work with. This is demonstrable through the number of companies offering competitive yields on Bitcoin stored on their platform, including the industry leading interest offered by BlockFi.
However, the Ether lending markets are not nearly as active. In fact, demand for borrowing ETH is as low as we’ve seen it. According to the Q1 report put out by Genesis Capital last month, just 3% of their overall loan portfolio is in ETH. Additionally, platforms like Poloniex and Compound are offering borrowing rates on ETH as low at 0.01%.
Market conditions are the key element in a company’s ability to provide their clients a yield on an asset. As a result, we expect to see services across the industry continue to drop rates on ETH until the lending demand improves. However, with BTC markets as active as they are, we can expect to see more players entering the space, providing our industry with more competition and better products.