As institutional investors wade increasingly further into the cryptocurrency ecosystem, they are contributing to a significant bump in demand for cryptocurrency lending services.
That’s according to the Q3 Digital Asset Lending Snapshot from Genesis Capital, who in March launched the cryptocurrency industry’s first institutional lending business. Since the service’s launch seven months ago, the firm says that it has originated more than $550 million in loans, $130 million of which are currently outstanding.
Unlike other cryptocurrency loan providers, Genesis Capital — which is an affiliate of over-the-counter (OTC) trading firm Genesis Global Trading and a wholly-owned subsidiary of the Digital Currency Group — exclusively serves institutions such as hedge funds, professional trading firms, and industry companies that use cryptocurrency as working capital for their ordinary business operations.
Notably, the particular assets that firms are borrowing shifted significantly during Q3. In July, a quarter of all loans were denominated in ether (ETH), as a number of hedge fund clients were shorting the ethereum price. As of the end of September, ETH accounted for just 3.7 percent of all loans, ranking it behind not only bitcoin but also XRP (17.8 percent), ethereum classic (4.2 percent), and litecoin (3.9 percent).
Bitcoin’s share of the lending market, meanwhile, peaked in August at more than two-thirds of all Genesis loans and stood at 62.6 percent at the end of the quarter. The share of bitcoin on loan fluctuated less than other assets, which Genesis attributed to the fact that it is “the most widely used asset for non-speculative reasons, like working capital in remittance and arbitrage trading across exchanges.”
Speaking with MarketWatch, Genesis Global Trading CEO Michael Moro said that the firm’s lending services are often utilized by bitcoin ATM operators, who require access to a steady supply of cryptocurrency but also need to minimize their exposure to price volatility.
“They need to have bitcoin in a hot wallet, but they don’t want the price risk associated with holding it so when a customer buys at an ATM they will immediately re-buy it from Genesis,” he said.
Genesis said that, toward the end of the quarter, hedge fund activity ramped up in both the short and long sides of the market.
“In September…hedge funds became more active on the short-side and added to their speculative long-term positions. Trading firms also saw increased opportunities for arbitrage and market-making as derivative liquidity increased across markets,” the firm said in the report. “These firms generally borrow digital assets to trade against derivatives like futures and swaps. We believe this kind of activity will continue to pick up as derivative markets mature.”
Those markets as CCN reported, appear to be maturing at a steady pace. Just yesterday, U.S. bitcoin futures exchange CME said that in Q3 its BTC markets experienced a 41 percent quarter-over-quarter increase in trading volume.
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Last modified: May 20, 2020 5:08 PM UTC