The recent rise in Bitcoin prices, which exceeded $100,000 for the first timeis making ripples in the long-struggling cryptocurrency lending sector, particularly through decentralized finance (DeFi) applications.
According to Bloomberg a reportthe speculative excitement surrounding Bitcoin has not only invigorated its trading, but also extended to lending platforms, indicating a potential return of this important sector of the cryptocurrency market.
Bitcoin funding rate increases tenfold
Bloomberg data shows that Bitcoin’s funding rate — the amount blue-chip traders pay to maintain long positions in perpetual futures — rose significantly in November, increasing more than tenfold since early June.
This increase reflects a growing desire for leverage as the value of Bitcoin has more than doubled this year, driven by optimism surrounding the cryptocurrency’s increasing integration into the market. Mainstream finance Under the next Trump administration.
The revival of the cryptocurrency lending sector is noteworthy given its turbulent past. In 2022 and early 2023, many lending platforms faced major challenges, with several market players declaring bankruptcy after questionable lending practices.
However, recent data suggests that cryptocurrency lending activity has nearly tripled in the first nine months of 2024 compared to the previous year, although it still lags behind the highs of 2021.
“Demand for bitcoin-backed loans has soared, as those who previously held them look to use their wealth for purchases like homes and cars,” said Mauricio Di Bartolomeo, co-founder of Ledn, a cryptocurrency company. Lending platform. He noted that many new entrants are leveraging their assets to make long-term investments.
Crypto lending sector recovery
Lenders play a crucial role in the cryptocurrency ecosystem by naturally providing liquidity and facilitating trading. Volatile market. However, traditional banks are still reluctant to extend credit to cryptocurrency market participants due to ongoing regulatory uncertainties.
This gap has allowed cryptocurrency lenders to thrive, especially during the 2021 bull market, when companies like Genesis and BlockFi became major players in providing capital to borrowers.
Shadows of past failures still linger, as evidenced by the recent guilty plea of Alex Mashinsky, co-founder of the now-defunct Celsius Network, which I confess For fraud charges. Celsius collapsed in 2022, leaving behind more than $1 billion in debt and a complex bankruptcy process to repay creditors.
Despite the recovery in lending activity, current levels are still well below what they were in 2021. According to Galaxy Research, lending via DeFi apps and centralized providers reached nearly half the volume recorded in the first nine months of 2021, despite… Reaching $36.8 billion. – A three-fold increase over the same period in 2023.
Decentralized finance platforms Particularly noteworthy, it managed approximately $31 billion in loans, while central servicers accounted for $5.8 billion. This is reflected in the total value locked in Ethereum-based lending apps, which recently surpassed its peak in 2021, according to data from DeFiLlama.
While market leverage is already rising, some caution remains. Many market participants remain wary of lending following the turmoil of the previous cycle when some lenders offered unsustainable double-digit returns on unsecured loans.
Institutional lenders, in particular, take a more conservative approach. Jeffrey Park, portfolio manager at Bitwise Asset Management, noted that while their company previously made loans to cryptocurrency lenders, it has since exited that strategy due to declining client interest in cryptocurrencies. High risk return opportunities Post-FTX crash.
However, some exchanges and central brokerages are stepping in to fill the lending void. For example, Galaxy Digital reported a 20% increase in its loan book since mid-August, to an average of $863 million in the third quarter.
At the time of writing, Bitcoin was trading at $99,130, up 1.5% over the past 24 hours.
Featured image of DALL-E, chart from TradingView.com