Cryptocurrencies appear to have staying power, Federal Reserve’s Chairman Jerome Powell said in June. Perhaps truer words have never been spoken, as the market value of all cryptocurrencies has doubled to $1.3 trillion this year, recovering from last year’s crash.
More impressive is the renewed interest in centralized crypto-collateralized finance after last year’s controversial collapse of industry giants BlockFi, Celsius, and others.
“Since the soft launch of our lending offering on Sept. 13, we’ve been surprised by how much demand there is for crypto-secured loans,” Alexander Blume, managing partner at SEC-registered investment adviser Two Prime, told CoinDesk.
“We have seen about $2 billion in demand for bitcoin-secured loans since we started offering them in September,” Blume said.
Crypto-collateralized lending is an arrangement where a borrower pledges bitcoin (BTC), ether (ETH), or other digital assets as security and primarily draws the loan in the form of fiat currencies. In case a debt goes bad, the lender usually, as the contractual authority, liquidates the pledged crypto asset to recover the amount loaned.
The loans are typically overcollateralized, meaning the value of the collateral is far greater than the loan’s value. It ensures the lender has some cushion to protect against losses from a potential decline in the value of the collateral asset.
Crypto-backed fiat loans are preferred during bullish market trends as rising prices boost the value of the collateral while the borrower deploys the fiat loan to purchase other cryptocurrencies or buy mining equipment, usually denominated in U.S. dollars.
The arrangement allows miners or investors to keep their crypto holdings while sourcing additional fiat money to fund operations and yield-generating strategies.
CeFi platforms like BlockFi, Celsius and Voyager saw tremendous growth during the 2020-21 bull runs before last year's crypto market crash exposed the lack of proper risk prevention measures at these lending giants. At its peak, Celsius had over $20 billion worth of assets under management and more than 1.7 million users.
The three firms declared bankruptcy last year, freezing depositors’ accounts and their ability to withdraw their money. The episode drew the ire of U.S. regulators.
"After the fall of Genesis, BlockFi, Celsius, and others, a major gap in the market emerged for responsibly managed secured loans for institutions. Two Prime is well-positioned to fill it," Blume said, adding that we are focused on institutional borrowers.
About 85% of the fiat loans extended by Two Prime so far are collateralized by bitcoin, while the rest are secured by ether and other larger alternative cryptocurrencies.
Interest rates vary based on loan-to-value ratio, duration and size, but generally range from 5% to 12%, Blume said.
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