Ether has cannibalized bitcoin in Genesis’ loan book as more hedge funds borrow ETH to deploy into decentralized finance (DeFi) protocols, the cryptocurrency lender reported in its Q1 results on Wednesday.

ETH loans at Genesis, which is owned by CoinDesk parent company Digital Currency Group, increased by 400% from $465 million in Q4 2020 to $2.4 billion in Q1. ETH now makes up 27% of the lender’s loan book, whereas its portion was just 15.5% of the loan book in Q4. 

Meanwhile ETH locked in DeFi overall has increased from $15 billion to $60 billion, a 300% increase. 

“It shows just how much institutions are taking DeFi seriously,” said Momin Ahmad, chief strategy officer at crypto credit data company Credmark. “It’s kind of hard in DeFi to figure out who’s doing what.” 

Genesis as DeFi gateway

The lender originated 163% more loans in the first quarter than it did in the previous quarter. Its total loans outstanding now amount to $9 billion, a 136% increase from the $3.8 billion in loans outstanding the firm held in Q4. 

Genesis did note a decrease in BTC lent out in Q1 compared to other quarters because traders have now lost the arbitrage opportunity of selling bitcoin at a premium in the public market after a vesting period in the Grayscale Bitcoin Trust (GBTC), which is now trading at a discount. (Grayscale is also owned by Digital Currency Group.)

In response to this “lackluster demand,” Genesis lowered its annual rates on borrowed BTC from depositors from 3% to 6% to between 1% to 3%. 

“A small percentage of our overall loan portfolio was financing the GBTC premium arb,” said Matt Ballensweig, Genesis’ vice president of lending. “The trades we did finance were with some of our best and largest counterparties who posted collateral either in the form of cash, crypto, private placement shares or a mix of these.”

U.S. dollars (USD) and stablecoins maintained roughly a 21% share of the loan book because demand for cash has been “relentless,” Genesis said in its release.

The lender also described a “cash-deficit issue” as a reason for crypto-backed cash loan demand. This past month, Silvergate Bank reported a 52% increase in bitcoin-backed loans since last quarter, and Signature noted that bitcoin-backed loans would begin to show up in its earnings later in 2021. 

“Genesis is actively looking to partner with banks such as Silvergate, Signature and investment banks to bring more cash to traders in the crypto market as yield opportunities on USD remain very attractive relative to other credit opportunities,” Ballensweig said.

Trades were ‘significant drivers of growth’

Genesis’ spot volume increased by 287% from $8.1 billion in Q4 to $31.5 billion in Q1, bolstered in part by Genesis Treasury, a new service at Genesis that helps corporates accumulate bitcoin through various strategies. 

Derivatives trading increased by 133% to $10.5 billion in Q1. 

“Although we grew our counterparty base by 21% over the quarter, our most significant drivers of growth were higher frequencies of trades and increased notional per trade from our crypto-native hedge fund client base,” Genesis said. “These clients were early adopters of our platform and were well positioned to take advantage of the [over-the-counter] liquidity we provided to take short-term, tactical bets in option format.”

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