Bitcoin ETFs and bankruptcy refunds have given a second wind to crypto lending

• The crypto lending sector is making a comeback thanks to spot bitcoin ETFs and clients recovering their assets from bankrupt companies, the Ledn co-founder said.

• The Bitcoin rally has validated the investment thesis of cryptocurrency holders.

• The company survived the cryptocurrency winter by being “boring, slow, and safe.”

The crypto lending industry is recovering from the cryptocurrency winter, which blew up several big players, thanks to bitcoin {{BTC}} Exchange Traded Funds (ETFs) and lenders recovering some of their assets from companies bankrupt.

“What I see is that this market is growing again,” Mauricio Di Bartolomeo, co-founder of cryptocurrency lending firm Ledn, told CoinDesk during a recent interview at the Consensus 2024 conference in Austin, Texas. “The market never really went away; [just] I’m scared.”

Crypto lending is similar to conventional banking. Customers deposit bitcoin or other cryptocurrencies with a company like Ledn and earn interest or use those cryptocurrencies to back loans. The interest paid to depositors is generated by lending their cryptocurrencies to others and charging them interest.

The sector imploded spectacularly in 2022 as cryptocurrency prices plummeted, with companies including Celsius, BlockFi and Genesis filing for bankruptcy.

Since then, the digital assets sector has recovered from the bear market downturn. Prices have risen dramatically, with the CoinDesk 20 Index up more than 200% since the end of 2022. The rally gained momentum late last year after BlackRock and other conventional finance giants successfully applied to create bitcoin ETFs in the U.S. According to Di Bartolomeo of Ledn, the positive narrative surrounding these funds is one of the main reasons why users have returned to the lending market.

“Bitcoin went from $20,000 to $70,000 and became the focus of the political race in the United States,” he said. “This means there is more interest, there is a real product market for bitcoin as an asset and for bitcoin as collateral for loans.”

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

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

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Refund of bankruptcy

Another reason why users are returning to the lending market is that many of the failed companies are starting to give users their money back. Many of them are now returning to the lending market, according to Di Bartolomeo.

When asked why this is the case, he explained that for most of these users, their investment thesis – if you hold them long enough, you’ll get wealth appreciation – has continued despite market downturns . These users have been “brought to their knees” by some bad actors, but when they start to reclaim their assets, many of the “hardest users” likely won’t sell, he said. Di Bartolomeo added that this is the time when they turn to the lending market to use their assets to take and make loans.

“What I see is kind of hard evidence that people want to hold their bitcoin for the long term and they also want to have their cake and eat it,” he said. A customer might be worth millions in bitcoin, but if he turns to a TradFi bank, he won’t recognize his digital assets as collateral for a loan. “This is what we [lenders such as Ledn] bridge [the gap] for these customers,” he added.

Surviving the cryptocurrency winter

So how did a centralized lender like Ledn survive the cryptocurrency winter when many went bankrupt? The short answer is to stick to the fundamentals of lending and hiring. Ledn works only with qualified and vetted institutions, has no asset-liability mismatches and does not take part in DeFi yield farming, he said. “This means that if someone lends me bitcoin, I lend bitcoin; if someone lends me a dollar, I lend dollars. There is always someone who takes. And there is always liquidity,” Di Bartolomeo said.

He also added that all lending and borrowing activities are term-matched, meaning that if a user lends an asset with seven-day terms, Ledn lends it to another user who can pay it back in five, providing liquidity for the assets .

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

To know more: Cryptocurrency financiers caused cryptocurrency contagion last year. How is the sector rebuilding?

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