If you own some Bitcoin, you may be tempted to hold on and hope for the best. That may take a while, since Bitcoin and other cryptocurrencies have slipped into a bear market—Bitcoin is off more than 28% from its record high, recently trading around $47,500.
But some owners of cryptos aren’t just banking on higher prices. They’re acting like bankers themselves, handing their holdings to lending companies and pocketing interest on loans. Lending Bitcoin can generate annualized yields from 3% to 8%. Yields on smaller “alt-coins’’ reach double-digit rates. And stablecoins like USD Coin —designed to maintain a fixed $1 value—may earn 10%.
“We give the yield we generate back to our customers, who gave us the assets,” says Alex Mashinsky, CEO of Celsius Network, one of the largest lenders, with $28.6 billion in assets and 1.5 million clients. “Just like you can borrow against Apple or Google stock, you can borrow against your Bitcoin,” he adds.
Yet investors aren’t getting a free lunch. Along with the risks of lending assets that could plummet overnight, there’s an array of company-specific and market dangers. Regulators are circling, too, ordering some lending services to shut down in certain states.
“A lot of this is money chasing itself around on the blockchain,” says Paul Brody, head of EY Global’s blockchain practice. If the market crashes and doesn’t quickly recover, he adds, it could have a cascading effect as borrowers default.
Lending digital assets is turning into a big business. Companies such as Celsius and BlockFi now manage billions of dollars each in crypto. Genesis, an institutional lender and prime broker owned by Digital Currency Group, originated $35.7 billion of crypto loans in the third quarter, up 586% year over year. Nexo, another lender, says it has $12.3 billion in assets and has paid out $200 million in interest.
Like banks and brokerage firms, crypto lenders offer interest-bearing accounts, collateralized loans, credit cards, and other services. And they’re competing aggressively for capital, pitching bonuses and token rewards. Borrow $1,000 against $10,000 in Bitcoin on lending platform Abra and you would receive $5 worth of a token called CPRX. BlockFi now has a co-branded credit card with Visa (ticker: V) including 1.5% back in Bitcoin on all purchases. Celsius and Nexo bump up yields with their proprietary tokens.
Investors also earn yields on crypto through exchanges and decentralized-finance, or DeFi, networks. More than $260 billion worth of crypto is now locked into “smart contracts” on DeFi platforms, according to DeFiLlama.com.
Why are yields so high? The answer is a mix of risk, market inefficiencies, and high demand for borrowing cryptos and stablecoins.
The model for lending is similar to that of a traditional brokerage: Crypto lenders offer collateralized loans backed by the securities of clients. Capital for loans comes from the holdings of other clients, and they receive a share of the interest paid, after the loan brokers take a cut. Investors can usually withdraw their assets at will, though it may take a few days. Interest is paid in a crypto or stablecoin, and it may adjust frequently, based on market demand.
Most lenders offer tiered rates, pitching higher yields on smaller amounts. At BlockFi, Bitcoin earns 4.5% on 0.10 Bitcoin and 1% on 0.10 to 0.35 Bitcoin. Celsius yields a bit more, offering 6.2% on 0.25 Bitcoin and 3.05% above that, at current rates.
Stablecoins often yield 10% on many platforms. Lenders pump up the yields with reward tokens and other bonuses, and stablecoins are in demand for trading, market making, and liquidity. Moreover, crypto owners can use Bitcoin as collateral for a stablecoin loan, leveraging gains in the asset without selling it. “If you give me Bitcoin as collateral, I can only lend you a stablecoin,” says Mashinsky.
High-Yielding Cryptos
Crypto lending yields are relatively high & vary by the broker & the coin.
| BlockFi | Celsius Network | Abra | Nexo | |
|---|---|---|---|---|
| Bitcoin | 4.50% | 6.25% | 3.15% | 4.0% |
| Ether | 0.25 | 3.25 | 3.65 | 4.0 |
| Tether (Stablecoin) | 9.50 | 10.0 | 9.0 | 10 |
| USD Coin (Stablecoin) | 8.0 | 10.0 | 8.0 | 8.0 |
Source: Company Reports
Another reason that yields are high: Traders can capitalize on wide pricing discrepancies. Crypto markets are inefficient and decentralized, creating opportunities for hedge funds, exchanges, market makers, and other firms to profit off high bid/ask spreads between buyers and sellers. “There’s a lot of money in market making,” says Zac Prince, CEO of BlockFi. “But you need inventory to make markets. If you don’t want to buy Bitcoin outright, you borrow it.”
How safe is crypto lending? The companies say they use rigorous risk controls and impose steep collateral requirements—up to 200% of a loan’s value for highly volatile cryptos. Loans may be liquidated automatically if prices fall below certain levels. And loan brokers may issue margin calls, requiring borrowers to shore up collateral. “These companies have an interest in their business model working, and that requires good protections for customers,” says Daniel Davis, an attorney for crypto companies with law firm Katten Muchin Rosenman.
Still, investors shouldn’t count on government protections against losses. FDIC bank insurance or SIPC brokerage insurance isn’t available in crypto. The industry isn’t regulated as closely as banks or brokerages. And while lenders may be conservative with loan-to-value ratios and capital reserves, they may take liberties.
Both Celsius and BlockFi, for instance, say in their risk disclosures that they may “pledge, repledge, hypothecate, rehypothecate, sell, lend, or otherwise…use any amount” of digital assets at their discretion. Hypothecating is pledging collateral for a loan; rehypothecating means repackaging collateral into another loan. Those practices have frequently landed Wall Street in trouble when counterparties like hedge funds crashed.
“Crypto goes through a stress event at least once a year, and we come out clean,” says Mashinsky. “The regulators looked into us and said these guys know what they’re doing,” he adds. BlockFi referred Barron’s to its risk disclosure statement.
Yet the crypto market isn’t trivial anymore; it’s worth $2.3 trillion overall, and leverage has built up through futures and other derivatives. Stresses or selling pressure in one area could ripple into others; leveraged borrowers, facing margin calls or forced liquidations, may have to shore up collateral if they can afford it, or abandon their positions if they can’t, defaulting on their loans. “These lending platforms are designed to withstand a significant amount of volatility, but if the entire market declined by more than 30%, it could trigger a cascade of redemptions and challenges,” says Brody.
The crypto loan market is also opaque—a batch of assets could be reloaned several times, and if one in the middle defaults, the original lender may need to be repaid from a company’s capital buffers, assuming they’re first in line. Wall Street made a fortune by selling and bundling collateralized loans before the enterprise collapsed in the mortgage crisis. “There are similar risks in this,” says Brody.
Regulators have taken notice. The Securities and Exchange Commission threatened to sue Coinbase Global (COIN) if it launched a lending platform, prompting Coinbase to cancel its launch. Financial regulators in states such as Alabama, Kentucky, New Jersey, and Texas have launched inquiries or “cease and desist” orders to Celsius and BlockFi. New York recently ordered two lenders to shut down, including Nexo, and sought information from three others.
The companies argue that their products don’t violate securities rules, and they are contesting the shutdown orders. Nexo says it wasn’t offering a lending product in New York, and points out that its finances are audited, including publicly available data on its reserves. “We have three law firms giving us opinions that everything we do is compliant and legal everywhere we operate,” says Mashinsky. BlockFi says that it believes its products and services are lawful.
Abra CEO Bill Barhydt says the company “digs very deep into risk management.” Accounts are managed by Prime Trust, a crypto trust company. Loans are highly collateralized, he adds, and Abra holds enough reserves to meet withdrawal requests, typically within one business day. Still, he cautions, crypto lending isn’t for everyone. “Bitcoin and Ether aren’t going away, but if you’re a holder of alt-coins, you could lose all your money,” he says. “Go in with eyes wide open, not delusions of grandeur.”
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