Bitcoin ETFs, Bankruptcy Paybacks Have Given Crypto Lending a Second Wind

Ledn’s co-founder said the crypto lending industry is making a comeback thanks to spot bitcoin ETFs and customers repurchasing assets from bankrupt companies.

Bitcoin’s rally confirmed the investment thesis of crypto holders.

The firm survived the crypto winter as “boring, slow and safe.”

The crypto lending industry is recovering from the crypto winter that sent many major players flying, thanks to spot bitcoin {{BTC}} exchange-traded funds (ETFs) and creditors reclaiming some of their assets from bankrupt companies.

“What I see is this market coming roaring back,” Mauricio Di Bartolomeo, co-founder of crypto lending company Ledn, told CoinDesk during a recent interview at the Consensus 2024 conference in Austin, Texas. “The market has never actually split; [just] scared.”

Crypto loans are similar to traditional banking. Customers deposit Bitcoin or other cryptocurrencies with a company like Ledn and earn interest or use that cryptocurrency to back loans. The interest paid to depositors is earned by lending their crypto to others and receiving interest from them.

The industry experienced an extraordinary boom in 2022, with crypto prices plummeting as companies including Celsius, BlockFi, and Genesis filed for bankruptcy.

Since then, the digital asset industry has rebounded from the bear market downturn. Prices have risen and the CoinDesk 20 Index is up over 200% since the end of 2022. The rally kicked into high gear late last year after BlackRock and other traditional finance giants successfully filed to create bitcoin ETFs in the U.S., according to Ledn. According to Di Bartolomeo, the positive story about these funds is one of the main reasons why users are returning to the lending market.

“Bitcoin rose from $20,000 to $70,000 and became the focal point of the political race in the United States,” he said. “So that means there is more interest, there is a real product market for Bitcoin as an asset and Bitcoin as collateral for lending.”

In fact, Ledn processed more than $690 million in loans in the first quarter, its most successful quarter since its inception in 2018. More than 84% of loans processed were directed to institutional clients as demand increased following the approval of Bitcoin ETFs in January. . Ledn processes loans only in bitcoin, Ethereum’s ether {{ETH}} and two stablecoins (USDC and USDT).

Institutions participating in this sector are now mostly market makers from both Wall Street and crypto-native companies. “These are companies that operate in ETF markets as well as spot,” Di Bartolomeo said. “Some have made their names in crypto, some on TradFi.”

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Bankruptcy repayments

Another reason why users are returning to the lending market is that many of the bankrupt companies have started giving users their money back. According to Di Bartolomeo, many are now returning to the credit market.

When asked why this was the case, he explained that for many of these users, their investment thesis (if you hold them long enough, you’ll realize the value of wealth) remains valid despite market downturns. These users have been “brought to their knees” by some bad actors, but many of the “hardcore users” will likely not sell as they begin to reclaim their assets, he said. This is when they turn to the lending market to use their assets to borrow and lend, Di Bartolomeo added.

“What I’ve seen is indisputable evidence that people want to hold their Bitcoin for the long term, and they also want to have their cake and eat it too,” he said. A customer may be worth millions in Bitcoin, but when they approach a TradFi bank they will not accept their digital assets as collateral for a loan. “This is what we do [lenders such as Ledn] bridge [the gap] this is for customers,” he added.

Surviving the crypto winter

So how did a centralized lender like Ledn survive the crypto winter that saw many go bankrupt? The short answer is to stick to the basics of the lending and borrowing business. He said Ledn only works with qualified and audited institutions, has no asset and liability mismatch, and is not involved in DeFi yield farming. “This means if someone lends me bitcoins, I lend bitcoins; if someone lends me a dollar, I lend them dollars. There is always a buyer. And there is always liquidity,” Di Bartolomeo said.

He also added that all lending and borrowing activities are maturity compatible, meaning that if a user lends an asset with seven-day maturities, Ledn lends it to another user who can return it within five days, providing liquidity for the assets.

“People were calling us boring and we said listen, this is our way: boring, slow and safe,” he said.

Read more: Crypto Lenders Caused Crypto Contagion Last Year. How is the Sector Being Restructured?