The crypto-lending industry, which was severely impacted during the last major bear market, is experiencing a revival. A new wave of creditors is emerging to meet the ongoing demand for debt in the market.
An array of lenders, from traditional banks to crypto-centric firms, are either currently providing capital or in the process of doing so. This infusion of capital is facilitating various market activities, including leveraging bets and offering short-term liquidity essential for trading.
Recently, Cantor Fitzgerald, a financial-services company previously under the leadership of U.S. Commerce Secretary Howard Lutnick, initiated a Bitcoin financing venture with a starting capital of $2 billion. In another development, Bitcoin software firm Blockstream Corp. acquired a substantial multi-billion dollar investment in its crypto lending funds. Additionally, Xapo Bank, a crypto wealth manager, has started providing Bitcoin-backed loans of up to $1 million.
David Mercer, the chief executive of the institutional trading platform LMAX Group, remarked, “The new lenders will be more institutional in nature,” indicating that banks are expected to enter the space and offer credit facilities to major institutions engaging in asset trading.
The surge in crypto lending initially occurred during the lead-up to the 2021 market bull run, characterized by the rise of native lenders like Genesis Global Capital, Celsius Network, and BlockFi. These firms ended up underwriting unsecured loans to hedge funds and exchanges that eventually faced financial issues, partly due to a crash in crypto prices. All three companies subsequently filed for bankruptcy, resulting in reduced liquidity and access to capital markets for traders, prime brokers, and market makers.
Risk-management challenges persist, as noted by Rob Hadick, general partner at Dragonfly, a crypto venture firm. He pointed out the scarcity of entities willing to provide leverage and manage crypto risk effectively, which has become a significant issue for many.
In the absence of industry-native lenders and traditional financial institutions willing to engage with crypto firms—partly due to increased regulatory scrutiny under the Biden administration—crypto exchanges, prime brokers, and market makers have attempted to fill the lending gap. Bitstamp U.S.A. CEO Bobby Zagotta expressed optimism that under the new administration, regulators might adopt a more reasonable approach, encouraging banks to become more involved in the sector.
Bitcoin-backed loans remain a prevalent solution for crypto firms seeking cash and enhancing short-term liquidity. Nevertheless, traditional banks often avoid this avenue due to the cryptocurrency’s inherent volatility as collateral. Adam Sporn, head of prime brokerage and U.S. institutional sales at BitGo, highlighted this constraint, noting the lack of large banks lending in the digital asset space.
Participants in the industry anticipate significant growth in crypto lending as traditional institutions become more receptive, encouraged by policies and regulations supported by U.S. President Donald Trump. Hadick from Dragonfly noted increasing enthusiasm among traditional lenders due to favorable conditions set by the current administration and regulatory bodies.
Mercer from LMAX suggested this could lead to Bitcoin-backed loans bolstered by larger balance sheets and more advanced risk-management systems within traditional financial institutions. So far, the resurgence in crypto lending has been marked by a conservative approach, with reduced loan-to-value ratios requiring borrowers to make larger initial payments to mitigate risks.
Despite the increased demand for lending services and a more favorable administration for crypto, the sector still faces credit risks inherent to the volatile asset class. Austin Campbell, an adjunct professor at New York University’s Stern School of Business and CEO of stablecoin company WSPN USA, expressed skepticism regarding the ability of crypto natives to generate the necessary credit expertise independently, advocating for involvement from traditional institutions instead.
