Bloomberg: The $5 billion encryption loan market is just a credit bubble that is about to burst?

This article from Bloomberg , the original author: Alastair Marsh

Odaily Planet Daily Translator | Yu Shunzhen

Bloomberg issued a statement saying that the financial rules still apply to the parallel universe of cryptocurrencies.

A group of former Wall Street traders who are looking for wealth in digital assets say credit encryption is expanding too fast and is facing a (bubble) blast. According to blockchain data company Graychain Ltd., just two years ago, a nearly $5 billion industry was built out of nothing, and the number of loan platforms is rapidly increasing.

The images they portray are familiar to traditional financial professionals: loose loan standards, too much money chasing too few borrowers, and increased risk. While the size of outstanding loans is too small to incite the wider world, these concerns remind people that new technologies cannot eliminate financial booms and bust cycles.

Jason Urban, a former trader at high-frequency trading company DRW Holdings LLC and Goldman Sachs Group, is now CEO of DrawBridge Lending in Chicago, which provides encryption credit. Urban said, “It’s not the adoption of the problem that makes me sleepless, not even the uncertainty of regulation, but the credit risk. The torpedo hidden under the waterline is an event of MF Globa and Lehman Brothers type.”

  • Odaily Planet Daily Note: MF Global, a financial derivatives and futures brokerage company, declared bankruptcy in October 2011 for continued credit downgrades and margin calls. In 2008, Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection after a failed acquisition due to investment failure, triggering a global financial tsunami.

The crypto loan market was developed on the ruins of the collapse of digital assets in 2018. Holders who do not want to sell virtual currency at a low price either lend them to earn interest or use them as collateral to raise cash. The crypto loan business also allows traders to borrow tokens for short selling.


That's how Michael Moro's Genesis started offering loans – funding the bets on Bitcoin. Genesis is one of the largest digital credit providers and has provided more than $2 billion in loans to institutions since March 2018.

In standard bitcoin loans, Genesis customers need $1.2 million in collateral for every $1 million in bitcoin, with an annual interest rate of about 5%. The annual interest rate has fallen, starting with about 11%. If the price of Bitcoin rises during the loan period, the borrower must add US dollars, otherwise it will face liquidation; if the price falls, the borrower can recover some collateral.

Moro said: "People understand that risk is the source of fear. I see more competition, which makes the price meaningless relative to risk and collateral."

However, despite concerns that the market is growing too fast, others have said that there is no risk accumulation. Alex Mashinsky, founder of the loan platform Celsius Network, said that almost all loans are issued to institutions with strict compliance and risk management procedures. He said that the real risk facing the encryption market is to sell highly leveraged encryption derivatives to immature individual investors.

Zac Prince, chief executive of the loan company BlockFi, said his company's standards are strict and there have never been any overdue payments or losses. (Odaily Planet Daily Note: Loan loss refers to the loss of the actual amount of credit assets recovered from the book value. The loss of the loan is inseparable from the non-performance of the loan.) It is reported that BlockFi obtained Galaxy Digital Holdings Ltd including Michael Novogratz. Investor support within. At the same time, Antoni Trenchev, a former Bulgarian parliamentarian and Nexo co-founder, said his company encourages “low-leverage lending”, ie the loan value ratio (also called pledge rate ) does not exceed 50%.

Genesis CEO Michael Moro said it is difficult to estimate how much damage caused by credit events: it may be overlooked in the wider economy, and if a wave of liquidation leads to compulsory sales, it may lead to a decline in the value of encrypted assets.

In addition, encrypted loans can serve as a warning story that the new technology does not confuse the need to focus on basic concepts such as credit risk.

Matthieu Jobbe Duval said, “The cryptocurrency is still a small market compared to traditional asset classes. However, the feeling of deja vu remains: lack of regulation, access to cheap credit with minimal due diligence, and widespread optimism.” Duval is currently designing an encryption loan business for CoinList, a blockchain company financing platform.