Crypto-Secured Loans Market
The financial unicorns of the future will be run on the blockchain.
For centuries, people have believed that the whole world economy must depend on banks to prop up our complex financial system and to issue credit. In 2009, however, Satoshi Nakamoto published the Bitcoin Whitepaper, which showed everyone that this didn’t have to be the case. Almost ten years later the total cryptocurrency market capitalization, according to Coinmarketcap, reached $795 billion.
Cereal is a company that’s innovating to provide the cryptocurrency market with an infrastructure for credit products and services. Cereal’s Head of Analytics, Ilya Vorobiev, explains why:
“The current cryptoasset infrastructure already allows people to store, trade, mine and exchange cryptocurrency as well as to use it as a limited medium for payments. In contrast to traditional fiat markets, however, the cryptocurrency market lacks sophisticated credit instruments.”
Challenges for the market
According to Business Wire, owned and operated by Warren Buffett’s Berkshire Hathaway, 60% of the bitcoin in circulation hasn’t moved for the last 12 months or more. That’s over $780 million worth of assets sitting untouched — how many of the investors who’re “HODLing” some of this bitcoin could do with putting it to use to cover their daily expenses?
Individual investors need credit solutions, but there are currently very few available to cryptoasset investors despite considerable potential demand. In fact, as reported by Unchained Capital, the potential bitcoin that could used as collateral are around $20–30 bn. Meanwhile one of the lending platforms for the P2P economy conducted a survey among potential clients from 76 countries which showed that most investors would actually be interested in acting both as lenders and borrowers.
There is clearly a role for credit markets in cryptocurrency — the demand exists already. Cryptocurrencies are different from any asset that has existed before, so it’s unclear what the most popular credit solutions for cryptoassets will look like once the market has matured. However, some are already being proposed that make eminent sense given certain characteristics of the market.
For example, the price volatility and market liquidity of cryptocurrencies could serve as an ideal asset to serve as collateral for loans in fiat. Demand for such loans is likely to grow in proportion to the cryptocurrency market capitalization since investors are likely to try to avoid converting their crypto-assets into fiat, but will need to maintain liquidity to cover their daily expenses while cryptocurrency adoption remains low. It’s already the case that existing services are not able to satisfy existing demand due to limited supply, liquidity and backing.
Working business models
In the current market there are two models for the lending of fiat while using cryptocurrency as collateral:
— P2P loans. Platforms based on this model make money from transaction fees. Interest rates are high while the average loan amount is small. The projects that operate with this business model are differ from one another in terms of things like interest rates, maximum loan to deposit ratio, minimum loan amount, etc.
— Centralized loans. These lending platforms can be likened to traditional financial providers. In order to use these products investors are required to pass KYC/AML procedures, however they don’t require a credit scoring procedure and don’t ask to see bank records. Cereal belongs to this group. Cereal has a partnership agreement with the GigaWatt mining facility that also makes it possible for customers to buy mining equipment in installments while using the equipment itself as a deposit for their loan.
Demand exceeds supply
The demand for crypto-secured loans is big enough for not just one or two, but many different providers. According to CB Insights, the five biggest US banks control $3.7 trillion worth of commercial lending. Crypto-secured loans look set to improve the flexibility, dynamism and liquidity of cryptoasset owners’ investment positions, and ample consumer choice is a great thing for the health of a market that will prove a welcome addition to the cryptoasset infrastructure.
To learn more, the Cereal Whitepaper is available here.
To join the discussion, visit the Cereal Telegram at: https://t.me/cerealico
Cereal token sale website: https://cereal.cryptonomos.com/
Product website: https://cerealfinance.com
