The now booming cryptocurrency lending market came from quite humble beginnings to reach an estimated value of $5 billion USD today. A fledgling industry that clawed its way out of the darkness of the 2018 market crash, and seems to have done a commendable job at that.
An innovative approach by – and for- digital assets investors who did not want to let go of their crypto baskets at deflated prices, so they charted a new path to profit. The options were to lend assets out to short-sellers, loan them out to generate a passive income through interest and putting assets down as collateral to acquire cash.
Already Worth $5 Billion
The well above a billion dollar figure may be small when compared with the cryptocurrency market as whole, however, the growth rate coupled with a relaxed approach to lending requirements has raised eyebrows amount some traders, as Bloomberg reports.
The picture being painted is one of a scale that leans further and further off balance as the young market continues to grow. The number of willing lenders far outweighs the number of interested borrowers.
“What keeps me up at night is not adoption, or even regulatory uncertainty: it’s credit risk,”
says former Goldman Sachs trader, Jason Urban, who now ploughs his trade in the cryptocurrency market
How Real Is The Risk?
As it stands, the matter of a potential meltdown of the words youngest and fastest growing capital lending market is a tug of war between two trains of thought.
On the on hand, we have those who see the workings of the industry as a mirror image of the shadow banking practices that led to the 2008 financial crisis. Matthieu Jobbe Duval, a developer working for Coinlist, is one such example.
“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,” Duval said.
On the other hand, there are those who see do not see or acknowledge any build up of risk. This is an opinion based on the fact that the loans are -for the most part- being given to institutions. Further, those on this side of the fence argue that the loan requirements are sufficiently stringent. According to the founder of Celsius Network, Alex Mashinsky: “The real risk facing crypto is highly leveraged crypto derivatives sold to unsophisticated individual investors,”
Interestingly, the Washington Post reported on a return of the shadow banking craze in the traditional stock market, in what looks to be a failure by institutions to learn from past mistakes.
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