Emily Walker
Recently, Bitcoin’s price has surged past the $100,000 mark for the first time, bringing renewed interest to the struggling crypto lending industry, especially in decentralized finance (DeFi) applications.
A Bloomberg report suggests that this excitement around Bitcoin isn’t just enhancing trading; it’s also revitalizing lending platforms, indicating a promising revival in this vital area of the cryptocurrency sector.
Massive Increase in Bitcoin’s Funding Rate
According to data from Bloomberg, Bitcoin’s funding rate—the fee traders pay to hold long positions in perpetual futures—has skyrocketed by over ten times since early June, especially throughout November.
This jump demonstrates a rising interest in leverage, as Bitcoin’s value has more than doubled in 2024, buoyed by enthusiasm about its growing acceptance in mainstream finance, particularly with the expected Trump administration.
The resurgence of the crypto lending industry is particularly impressive considering its recent troubled history. Numerous lending platforms faced severe challenges during 2022 and early 2023, leading to many bankruptcies due to dubious lending practices.
Nevertheless, recent statistics reveal that crypto lending activity has almost tripled in the first three quarters of 2024 compared to the previous year, although it still falls short of the peak levels seen in 2021.
“There is a significant increase in demand for Bitcoin-backed loans as long-term holders seek to leverage their wealth for major purchases like homes and vehicles,” stated Mauricio Di Bartolomeo, co-founder of Ledn, a crypto lending service. He mentioned that many newcomers are using their assets for long-term investment strategies.
Recovery in the Crypto Lending Sector
Lenders are vital to the cryptocurrency ecosystem as they offer liquidity and promote trading in a highly volatile environment. However, traditional banks remain cautious about lending to crypto market participants due to regulatory uncertainties.
This hesitance has allowed crypto lenders to thrive, especially during the 2021 bull market, with companies like Genesis and BlockFi emerging as significant sources of capital for borrowers.
The memory of past failures lingers, notably seen in Alex Mashinsky’s recent guilty plea, co-founder of the failed Celsius Network, for fraud. Celsius went bankrupt in 2022, leaving behind over $1 billion in debt amidst a complicated bankruptcy process.
Even with the increase in lending activity, current numbers are significantly lower than those of 2021. Galaxy Research reports that lending through both DeFi apps and centralized providers has reached about half the volume from the first nine months of 2021, though it has climbed to $36.8 billion, a threefold increase from last year.
DeFi platforms have proven to be essential in this recovery, managing nearly $31 billion in loans, while centralized lenders accounted for $5.8 billion. This trend is illustrated by Ethereum-based lending applications, which recently surpassed their 2021 highs, according to DeFiLlama data.
While leverage in this domain is climbing, caution still prevails. Many lenders are hesitant to participate following the upheaval experienced in the prior cycle when some offered unsustainable yields on unsecured loans.
Institutional lenders, particularly, are adopting a more cautious stance. Jeffrey Park, portfolio manager at Bitwise Asset Management, remarked that their firm has moved away from lending to crypto lenders due to reduced client interest in high-risk yield opportunities following the FTX collapse.
However, some centralized exchanges and brokerages are beginning to address the lending gap. For instance, Galaxy Digital reported a 20% increase in its loan book since mid-August, with the average reaching $863 million for Q3.
Currently, BTC is trading at $99,130, with a 1.5% increase in the last 24 hours.
Featured image from DALL-E, chart from TradingView.com