Crypto lending is now a $4.7 billion industry – but lenders aren’t seeing high returns just yet.
A new report by Graychain found the number of new crypto loans increased by 239% from the first quarter of this year to the second (5462 to 18562).
It’s a very new, and fast-growing sector, that two years ago virtually didn’t exist.
But Graychain’s research found that just $86 million in annual interest was paid on the $4.7 billion – an estimated return of just 1.8%.
That’s well under the 6-10% annual interest it costs to borrow crypto.
But loans are snowballing every month.
Graychain notes: “The data we have suggests that approximately 35% of originated loans are still active.
“This means that the industry is capitalizing on around 5.1% of its active value, or 1.8% of its originated value. Both of those numbers will grow.”
Why are returns relatively low?
The report suggests one reason returns are low is because most crypto loans are very short term, leaving little time for interest to accrue.
The report says:
“Over the past 18 months, approximately 244,000 loans have been originated. It is important to note that many of these are short term, weeks or even days long.
“This means that individual loans often don’t have much time to generate interest for the lender, and origination happens frequently”.
Loans originated in the first quarter amounted to $64.8 million; in the second quarter, that figure grew to $159.3 million.
Loans are getting smaller
The value of the new loans also isn’t increasing as fast as the number of new loans – the value is up 146% compared to the 239% increase in the number of loans – meaning there’s been a decrease in the average loan value.
“That means that people are making more small loans, rather than borrowing millions at a time.
“This suggests adoption (on the public platforms) by more average consumers, rather than institutional borrowers.”
Loaning your crypto for interest
A range of new services have sprung up enabling ordinary people to loan out their crypto at attractive interest rates – DharmaLever promises up to 14% annually, WhaleLand offers 11.46% if you lend out some Ethereum Classic, while BlockFi has 6.2% annual interest for Ethereum.
These rates change frequently but stablecoin lending offers some of the better rates: Celsius Network offers stablecoin lenders 8% while Compound Finance offers 12% for Dai and 9% for USD Coin.
Unfortunately, the report does not break down the average returns that individual lenders are actually making on an annual basis from such services.
Hopefully they can include that in a future report – Graychain intends to release an update every quarter.
Why do people borrow?
Almost 100% of loans are collateralized – with many platforms pitching services to retail borrowers as a way of ‘keeping’ their crypto and spending it (or reinvesting it).
People borrow for leverage (which magnifies both profits and loss), for arbitrage and for tax reasons (selling borrowed coins is treated differently by tax authorities).
The high turnover and number of short-term loans suggest many traders are using it for speculative activity – they borrow to avoid triggering a taxable event, then make a short term bet on a token’s movement, and then pay off the loan straight after.