During the fourth quarter of 2019 when crypto prices were on a downturn, cash was the king among the miners and hedge funds looking to take advantage of arbitrage opportunities and add leverage.
Genesis Capital revealed in its 4Q19 report that cash and equivalent loans as a percentage of outstanding loans increased significantly for the third consecutive quarter. The loans represented 37.2% of the New York-based digital currency lender. These figures were up from 31.2% in 3Q19 and 14% a year earlier.
More institutional fiat lenders to enter the space
The supply of cash in the crypto market, however, is limited and as such can be “very expensive in certain BTC price environments.” And this lack of cash access contributed to the sustained premium in futures vs spot markets which means cash rate increases tend to lead BTC price surges.
In 2020, the company sees the above-average forward curve premium to still exist keeping average cash borrow rates much higher than most digital assets borrow rates. This, however, will slowly normalize due to increased cash supply, operational efficiencies and an increase in the number of trusted exchanges.
“We expect more institutional fiat lenders to enter the space and partner with crypto native exchanges and trading desks to provide financing,” shares the report.
Loans in Bitcoin, however, dropped to 47% of the active portfolio, from 63% at the end of June, the time when BTC price hit 2019 high at $13,900.
Much of the last year, near-dated Bitcoin futures contracts traded at a premium to the spot price indicating a bullish bet that prices will rise over time. If this premium is large enough, traders borrow cash to buy the underlying spot and sell the future, to capture the premium.
“We are trading at 50% of the Bitcoin all-time high right now, so people are still saying that they are weary,” Genesis Capital Chief Executive Officer Michael Moro told Bloomberg. “But I guarantee the narrative changes dramatically when the price is back up.”
Seventh consecutive quarter of “strong growth”
In the third quarter of 2018. Genesis started providing cash loans which picked up steam as Bitcoin price was in a downward spiral in the second half of 2018. Originations also increased 34.8% from the prior quarter, marking the seventh consecutive quarter of “strong growth,” bringing total organizations since its launch to $4.3 billion.
Over the past year, they saw an explosion of demand with $3.1 billion in issued loans, a third of this amount has been from the fourth quarter only, breaking the record of $870 million set in the previous quarter.
As of Dec. 21, 2019, active loans outstanding stood at $545 million, up 21% from the previous quarter despite a significant decrease in BTC price.
Launched in March 2018, Genesis issued $1.2 billion in loans that year. The company offers loans ranging from two weeks to six months to institutional investors such as market makers and funds.
A stronger year ahead
In terms of international lending participation, the company registered substantial growth specifically in Asia, the restriction on capital flows in China leading to a strong cash need, and Europe. Activity in Europe remains robust as well, with the UK and Switzerland leading in overall financing activity.
In Q4, the borrower saw continued demand for cash, strong international growth of Asian borrowers, and increased derivative trading. Now, in this new year, Genesis Capital is expecting “Crypto-Friendly” regulation to drive more capital into the lending space.
However, Genesis is not the only seeing such strong growth, other crypto lenders like BlockFi is also planning to add five to ten new assets to its platform. And then later this year, they have plans to launch a credit card that will offer rewards in Bitcoin.
Back in December Celsius Network also said that institutional clients are becoming their key contributors.