Lending Tops Crypto-Industry by ROI: What Can Go Wrong?

News and Analysis

Lending is named the most profitable sector of the crypto-industry by return on investment. The niche keeps attracting capital and is expected to grow further in 2020. Akin to DeFi in general, the niche holds a lot of promise, but there is the other side to consider.

forklog.media rounds up the relevant numbers, suggested risks, and perspectives from traditional finance veterans and people from the crypto-industry.

ROI Distribution In Crypto-Industry

The metric enjoying media attention is the median return on investment in USD for the past year and 90 days. The numbers were published by Longhash and the dataset for 349 tokens came from an analytics firm Messari. The analysts divided the tokens by sector: lending, scaling, exchange, stablecoin, etc. Lending, the sector in question, includes 8 tokens, only five of which had a positive ROI: Maker, Nexo, Ripio Credit Network, Aave, and Cred. 

Nevertheless, with ROI over 75% for the past year and 15% for the past 90 days lending outpaced every other sector. It is also the only one to show a positive median ROI for both the year and 90-day intervals. 

ROI in percent vs. USD, by industry sector

ROI in percent vs. USD, by industry sector. Chart by Longhash.com 

According to Longhash, the chart doesn’t include sectors represented by 5 or fewer tokens, and the median was chosen, because the researchers found it more representative of the overall trend, than the average. 

It is also noted that none of the sectors in the dataset exceeded the 140% ROI of Bitcoin over a one-year timeframe.

Crypto-Lending Market Dynamics

Several reports published by crypto-lending companies and researchers since Q2 2019 indicate the growth of the lending niche.

A Q3 2019 report on crypto-lending published by CredMark in December 2019 estimates that over $6.4 billion in crypto-loans was issued through September 2019. According to CredMark’s report for the previous quarter, by that time the issued loans amounted to $4.1 billion. 

As pointed out by CoinDesk, loans issued by Genesis, a large crypto-lending company, increased by 21% during Q4 2019, compared to roughly 2% growth shown by JPMorgan, the biggest bank in the U.S.

“Obviously the crypto sector is not even a beauty mark right now compared with the banking sector, in terms of the size and maturity. But there is rapid growth in this new market, and it’s not just us. There are other companies trying to accomplish similar things,” Genesis CEO Michael Moro told CoinDesk.

Notably, a report by Ripple for Q4 2019 explains the growth of crypto-lending by low-interest rates in many fiat currencies, a growing number of digital asset market participants seeking working capital, and an increasing number of long-term digital asset holders looking to generate yield. 

Genesis Q4 2019 report also suggests that in 2020, crypto-lending will be boosted by miners seeking to upgrade their equipment in anticipation of the halving event.

“As we approach the halving this year, we’re expecting a handful of the largest miners to upgrade their facilities to become more efficient as they’ll be compensated less per block mined.”

The report also speculates that a more welcoming cryptocurrency regulation can let more capital flow into lending across Europe and China.

Fear of Lending Bubble and Other Risks

According to Bloomberg’s take on the crypto-lending boom, people from Wall Street think that the niche “has expanded too quickly and is headed for a blow-up.” They are concerned about lax lending standards and a large amount of money per borrower, as well as the general analogy with the 2008 financial crisis. 

“Crypto is still a small market relative to traditional asset classes, however, the feeling of deja-vu is there: lack of regulation, cheap credit available with minimal due-diligence, and broad optimism,” Matthieu Jobbe Duval, Head of Financial Products at CoinList, said to Bloomberg.

Another risk pointed out is the notoriously high volatility of cryptocurrencies. We have already mentioned in our take on DeFi’s $1 billion milestone that the price fluctuations may lead to under-collateralization and cascading liquidation of loans, which would be quite harmful to the sector. As CredMark reported, for Q3 2019, the active debt grew by 23%, while active collateral grew by 12%. The researchers believe that the discrepancy took place “primarily because collateral contains a larger percentage of crypto than debt (which includes more fiat/stablecoins), and crypto lost 25% of its value during the quarter.” 

There are also the usual risks when it comes to technological infrastructure. Since lending platforms rely on tokens and blockchains, they inherit the flaws and vulnerabilities of the underlying system. 

Main Takeaways

The crypto-lending is likely to have a lot in common with the entire DeFi sector since lending companies apparently constitute the larger part of all DeFi projects. To summarize, the most tangible risks of crypto-lending are related to potentially hostile regulations, high volatility of cryptocurrencies, and the lack of standards and due diligence across the niche.  

From what it looks like, the crypto-lending niche isn’t growing without a reason. As we are still waiting for mass adoption to come, there are entire groups of users, such as miners, who really need crypto-lending solutions and will continue contributing to the niche’s wellbeing. The traditional lending solutions won’t cut it because of the regulations and requirements that won’t fit a cryptocurrency-related business.

All in all, there is room for speculations regarding the future of crypto-lending and the food for thought is abundant. Especially when the upcoming halving in Bitcoin and CBDCs, which is the new hot thing anticipated to shake monetary systems around the world, are stirring up the industry and raising all sorts of questions.

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