Crypto lending revives from the ruins of the 2022 market mania

Bitcoin’s explosive rally to over $100,000 has lit a fire under the crypto lending market. After being left in tatters during the chaotic implosions of 2022 and 2023, the sector is staging a comeback.

Decentralized finance (DeFi) applications are taking center stage in this revival, with funding rates—fees paid by traders for leverage—skyrocketing more than tenfold since June.

Crypto lending volumes almost tripled in the first nine months of 2024 compared to last year, driven by renewed optimism about Bitcoin’s role in mainstream finance. The Trump administration’s promise of favorable regulations has added fuel to the frenzy.

Even so, the market remains a shadow of its 2021 highs, with many players treading carefully after the brutal losses that came from reckless lending practices in the past.

Bitcoin-backed loans and DeFi domination

DeFi platforms are dominating the resurgence. These applications, which allow users to borrow and lend directly without intermediaries, accounted for $31 billion in loans during the first three quarters of 2024, compared to $5.8 billion from centralized providers, according to Galaxy Research.

Overcollateralization requirements make DeFi lending safer. As reported by DeFiLlama, the total value locked (TVL) in Ethereum-based lending apps has already exceeded its 2021 peak.

Mauricio Di Bartolomeo, co-founder of Ledn, said demand for Bitcoin-backed loans has soared. Long-term holders are leveraging their wealth to buy homes, start businesses, and make other investments.

“People are learning they can use their Bitcoin as collateral,” Di Bartolomeo explained. At the same time, trading desks are borrowing heavily to take advantage of arbitrage opportunities and speculate on altcoins.

Despite these developments, lending activity is still only half of what it was at the peak of 2021. But compared to the collapse of 2022, when firms like Celsius and BlockFi filed for bankruptcy, the growth is significant. The introduction of crypto ETFs in the United States has also played a role in rekindling interest.

Wounds of the past

Alex Mashinsky, the co-founder of Celsius, recently pleaded guilty to fraud charges. Celsius, which had over $1 billion in debt when it imploded, is now in the process of repaying more than $3 billion to creditors. This mess served as a grim reminder of how reckless the sector had become during its last bull run.

Back then, lenders were offering double-digit yields on loans with little or no collateral. Three Arrows Capital, another high-profile casualty of that era, defaulted on massive loans, further destabilizing the market. These failures left investors skittish.

Even now, many institutional players are staying away from crypto lending altogether. Jeffrey Park of Bitwise Asset Management said his company used to run a fund that lent to crypto companies like Genesis. That stopped after the collapse of FTX, even though Bitwise never lost money on those deals.

“It wasn’t about the risks,” Park explained. “After FTX, clients just didn’t want to take on that kind of exposure anymore.”

Centralized lenders: A slow comeback

While DeFi takes the spotlight, centralized lenders are starting to regain ground. Galaxy Digital, led by billionaire Michael Novogratz, reported a 20% increase in its loan book since mid-August.

The company’s average lending volume for Q3 reached $863 million, up 23% from the previous quarter. Kraken is another player seeing growth. The exchange’s lending operations, which weren’t even active during the 2021 bull run, have surged 246% year-over-year as of November.

Tim Ogilvie, Kraken’s global head of institutional, said demand is “off the charts” as investors seek more exposure to the market.

Still, loan supply is limited. Many investors are chasing faster returns in speculative corners of the market, like memecoins. Retail is choosing tokens with 1,000% overnight returns instead of earning modest yields through lending.

DeFi lending has also benefited from these dynamics. Arbitrage strategies, shorting altcoins, and general market speculation are driving much of the activity. With TVL breaking records, platforms like Aave and Compound are thriving, even as some investors remain wary.

While the market hasn’t returned to 2021’s dizzying heights, the groundwork for a more stable lending ecosystem is taking shape. Demand is high, but so is skepticism. Whether this renewed interest can sustain itself without the bubble-like conditions of the past remains to be seen.

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