The lending of cryptocurrencies has been an interesting sector to observe over the past year as new products have proliferated in the market. Volatility has always been an active contributor to lending rates, and with the recent spike in volatility, lending rates on crypto exchanges have reached as high as 149% p/a on some cryptoassets (e.g. NEO), with rates even as high as 38% p/a earnable on USD. These developments create the opportune moment to explore margin lending products.
Margin lending in traditional markets
Margin lending has been a popular service offered by traditional stockbrokers for decades. It is a process whereby brokers lend either securities or cash to their clients for trading purposes. Lending rates offered by traditional brokers (e.g Charles Schwab) typically vary between 5.5% to 11% depending on the broker and the loan value.
Swiss based ETP enters the Crypto trading market | Data Driven Investor
For brokers, lending is a wonderfully profitable business. Given that Charles Schwab only pays a paltry 0.18% on their high yield savings product, it is no wonder that 57% of their revenue comes from net interest income (i.e. lending interest earnings after deducting interest paid to account holders) according to their 2018 10-K SEC filing. Despite the fact that they are a broker and not a bank, only 40% of their revenue comes from asset management and trading fees.
Lending in cryptocurrency markets
Blockchain technology has become synonymous with the democratization of financial opportunity; this is also true in the margin lending space as anyone is able to lend out their cryptoassets and earn the rates that brokers and institutions have been enjoying for years. Platforms such as Celsius Network, Nexo and Invictus Capital have enabled interest revenues to be passed directly on to the retail audience at interest rates that are, in some instances, 10x what is available in the traditional market.
The development of cryptocurrency lending platforms can largely be attributed to the maturation of cryptocurrency market post 2017. The latest report by Credmark, a cryptocurrency credit bureau, highlights that the lending market has expanded to over $6.4bn in loans originated by Q3 2019. This is up from a mere few hundred million just a few years before. Additionally, the lending market is experiencing quarter on quarter growth of 497 in new loans originated.
In the cryptocurrency sector, the lending market mainly functions with a few significant participants, namely miners, traders, high net worth individuals, and institutions. The most significant driver of demand for loans (especially loans provided via margin lending), is from traders.
Most of the large cryptocurrency exchanges facilitate some form of margin trading on their platforms. Some exchanges such as Bitfinex and Poloniex, however, enable peer to peer lending using a matching engine to bring liquidity providers and traders together. Exchange lending volumes are growing as traders seeking quick, affordable liquidity options and lenders look for attractive returns.
Market volatility continues to drive margin lending activity
Cryptocurrency volatility is the key driver of margin lending volume growth since higher volatility motivates more trading activity.
Spikes in lending rates often correlate to bitcoin price swings as traders look to increase their market exposure. As an example, the 30% surge in the bitcoin price on the 25th of October 2019 caused a corresponding surge in the USD lending rates, with annualized rates escalating as high as 20% pa during the month.
While the USD lending rates track the volatility of the crypto market, USD margin lending does not expose trading capital to price fluctuations of the underlying crypto market. In addition to no capital drawdown risks, margin lending returns provide diversification benefits.
Introducing the Invictus Margin Lending Fund
Invictus Capital has a distinguished track history within the cryptoasset space with the launch of index funds CRYPTO20, Crypto10 Hedged and Hyperion, (a blockchain VC fund). Invictus has further developed an innovative margin lending fund to allow investors to earn passive, high-yield dollar-based returns. The Invictus Margin Lending Fund (IML) offers investors a unique opportunity to take advantage of a nascent market that has to date provided consistent returns well above traditional money market yields.
With the current best US short term savings rate at 2% APY, the IML fund provides a unique opportunity to earn yields in excess of 10%.
Along with returns, the fund also has compelling structural benefits, including 24/7 liquidity through automated smart contract subscriptions and redemptions. Investors are able to redeem their tokens for TUSD (the operational currency of the fund) as and when they wish to realize returns.
With the continued growth of the lending market, and increasing buy-side demand — it is expected that USD lending returns, and thus the returns of the IML fund will continue to remain impressive.
Margin Lending: Earn the best interest rates in the cryptocurrency lending market was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.