Why the low number of crypto-based lenders on the market?

Towards the end of 2017, the world witnessed explosive growth in cryptocurrency trading. What was once considered an obscure investment opportunity soon became the go-to selection for traders and investors everywhere?

Bitcoin (BTC) ballooned to $20,000 per unit before retreating sharply to its current levels around $7,000 per unit. The value of the cryptocurrency market defied gravity, driving tens of thousands of traders to this burgeoning new paradigm. However, as with the Tulip Bubble in the 1600s, the mania was short-lived.

The top 5 digital currencies by market capitalization include Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCC), and EOS. Together, these top 5 cryptocurrencies make up $194 billion of the total $250 billion of all 1752 cryptocurrencies. That’s a staggering 77.6% dominance of the top 5, of which Bitcoin has a 47.4% market share. It’s equally interesting that the unprecedented growth of blockchain technology – the frictionless, anonymous, secure online transmission mechanism – is being adopted all over the world. Bricks and mortar banks are now turning to blockchain technology to cut costs, speed up transfers, and enhance the customer experience.

There appears to be a lag effect in the types of technology that are now available to borrowers. The traditional route a.k.a. banking institutions is slowly losing favour to online lenders which can cut costs dramatically compared to international banks. For starters online lenders can offer competitive loans to business customers with response times of just 1 – 2 days after applications have been made. While this is significantly slower than the anticipated approval rates on leading cryptocurrency loan platforms, it is significantly faster than the approval times offered by banks.

Small business lending in Australia is a classic case in point, given the high rejection rates that many businesses face when they go to bricks and mortar banks. Companies like Capify and Prospa have been going strong for many years, and they offer funding upwards of $5,000 with minimal paperwork required. It is possible to qualify for loans from non-bank lenders much easier than it is with a traditional High Street Bank. What’s equally interesting is that these non-bank lenders are quickly adopting blockchain technology to fast-track international money transfers.

This Begs the Question: Why Are We Not Seeing More Cryptocurrency Lending?

Many crypto lenders are attempting to get their proverbial feet wet in the financial markets. The technology that makes cryptocurrency such a viable proposition remains in its infancy stages. As such, tremendous volatility makes it difficult to create a sustainable business model that pays dividends. Between December 2017 and February 2018, the price of Bitcoin alone dropped approximately 70%. This meteoric crash wiped out hundreds of billions of dollars from global markets, and very little appreciation has taken place since then.

Crypto lending, in theory, is an excellent idea. The blockchain technology that underpins this is superb. Already, many crypto lenders operate in the US, Europe, Asia and elsewhere. Many of these blockchain firms have been operational for quite some time. The absence of a standard vis-à-vis regulatory frameworks makes it difficult for these financial institutions to operate as legitimate, credible business entities with mainstream appeal. The good thing about cryptocurrency is that it has the capacity to act without borders. It is not subject to the whims of the People’s Bank of China, the Federal Reserve Bank, the Bank of England, the Bank of Canada, and so forth.

Cryptocurrency loans are subject to volatility i.e. currency fluctuation, but they are already building these risk factors into their business models. To mitigate the volatility associated with cryptocurrency, many of these startups and established organizations are seeking additional rounds of funding to provide the necessary padding in the event of economic downturns. Regardless of the volatility that currently exists in the cryptocurrency loans market, there is still a burgeoning need for this new-age technology. There are many such examples of loan providers trying to establish themselves. These include the following:

  • CoinLoan provides loans that are secured by crypto assets. This company has a simple model that works as follows: the borrower gets a loan up to 70% of the market value after he/she deposits cryptocurrency. In other words, you can borrow against your crypto deposits and repay it with flexible lending terms and conditions. Multiple fiat (fiduciary) currencies are available for these types of loans. It is even possible to refinance your debt obligations, to prolong the loan term.

  • SALT it is a relatively new lending platform that is designed for blockchain loans. Borrowers are not subject to credit checks at all. You simply purchase tokens known as ERC20 SALT to become a member of this platform and then you use Bitcoin or altcoin as collateral. Once you have collateral invested in this platform, you can borrow money from the network of lenders currently operating on the platform. Currently, there is no guarantee of liquidity for all members on the platform, so you may have to wait for additional financing before you can make a successful loan application. A token costs at least $25, and they are only available on the SALT system. The benefit of this cryptocurrency-backed system is that you get to borrow fiat currency against your crypto assets and repay it at interest-rate between 10 and 15 per cent.

  • EthLEND has adopted a free market system for the provision of loans. Negotiations determine the duration of the loan and the interest rate of the loan. Since this is based on the Ethereum blockchain technology, any ERC20 tokens are permitted. If you do not stick to the terms and conditions of the blockchain-based contract, you will forfeit all of your collateral. The price of these LEND tokens is subject to price fluctuations and volatility.

Cryptocurrency lenders intend to offer the same services as full-fledged banking institutions, but regulatory constraints make it difficult to attain that status. This is not to say such regulation will not come into place; it is simply a matter of time. Margin calls and additional collateral are concerns for cryptocurrency lenders seeing their loan values depreciating or appreciating and how that relates to the principle of the loan. Soon, we will see regulation permitting global money transfers in a safe, secure, and structured financial ecosystem.