The recent Bitcoin price surge, which surpassed $100,000 for the first time, is creating ripples in the long-struggling crypto lending sector, particularly through decentralized finance (DeFi) applications. 

According to a Bloomberg report, the speculative excitement surrounding Bitcoin has not only invigorated its trading but is also spilling over into lending platforms, signaling a potential resurgence for this critical segment of the cryptocurrency market.

Bloomberg data shows Bitcoin’s funding rate—the premium traders pay to maintain long positions in perpetual futures—has skyrocketed in November, increasing more than tenfold since early June. 

This surge reflects a growing appetite for leverage as Bitcoin has more than doubled in value this year, driven by optimism surrounding the cryptocurrency’s increasing integration into mainstream finance under the upcoming Trump administration.

The revival of the crypto lending sector is noteworthy given its tumultuous past. In 2022 and early 2023, many lending platforms faced significant challenges, with numerous market players declaring bankruptcy following questionable lending practices. 

However, recent data indicates that crypto lending activity has nearly tripled in the first nine months of 2024 compared to the previous year, though it still lags behind the highs of 2021.

“Demand for Bitcoin-backed loans has surged as those who held from before look to utilize their wealth for purchases like homes and cars,” said Mauricio Di Bartolomeo, co-founder of Ledn, a crypto lending platform. He noted that many new entrants are leveraging their assets to make long-term investments.

Lenders play a crucial role in the cryptocurrency ecosystem by providing liquidity and facilitating trading in a naturally volatile market. However, traditional banks remain hesitant to extend credit to crypto market participants due to ongoing regulatory uncertainties.

This gap has allowed crypto lenders to flourish, particularly during the 2021 bull market, when firms like Genesis and BlockFi became key players in providing capital to borrowers.

The shadow of past failures still lingers, as evidenced by the recent guilty plea from Alex Mashinsky, co-founder of the now-defunct Celsius Network, who admitted to fraud charges. Celsius collapsed in 2022, leaving behind over $1 billion in debt and a complex bankruptcy process to repay creditors.

Despite the recovery in lending activity, current levels remain significantly lower than in 2021. According to Galaxy Research, lending via DeFi applications and centralized providers stood at approximately half of the volume recorded in the first nine months of 2021, although it has reached $36.8 billion—a threefold increase from the same period in 2023. 

DeFi platforms are particularly noteworthy, managing nearly $31 billion in loans, while centralized providers accounted for $5.8 billion. This is reflected in the total value locked in Ethereum-based lending apps, which has recently surpassed its 2021 peak, according to data from DeFiLlama. 

While leverage in the market is indeed rising, some caution remains. Many market participants are still wary of lending following the turmoil of the previous cycle when some lenders offered unsustainable double-digit yields on unsecured loans. 

Institutional lenders, in particular, are taking a more conservative approach. Jeffrey Park, portfolio manager at Bitwise Asset Management, noted that while their firm previously lent to crypto lenders, they have since exited that strategy due to diminished client interest in high-risk yield opportunities post-FTX collapse.

However, some centralized exchanges and brokerages are stepping in to fill the lending void. Galaxy Digital, for example, reported a 20% increase in its loan book since mid-August, reaching an average of $863 million for the third quarter. 

At the time of writing, BTC was trading at $99,130, up 1.5% in the last 24 hours.

Featured image from DALL-E, chart from TradingView.com

124 +