CRYPTOCURRENCY — The crypto market has seen some of the most monumental declines in its entire existence this year. In particular, the industry’s mother coin, Bitcoin (BTC), has lost more than 20 percent in just over a month and an astounding 65 percent loss since the beginning of the year.
However, despite these seemingly massive losses — for many once cherished and celebrated crypto projects — this year represented something far worse and overarching: their ultimate demise. Nevertheless, if we look much closer, we can see an alarming trend among these failures. Yes, this trend is the fall from the grace of crypto lenders.
The Dream Became a Nightmare
Essentially, crypto lending is the procedure of merging individuals with surplus crypto who are willing to risk their funds for a potential gain by depositing it on a platform. Moving forward, this then loans those funds out to someone who desires to borrow crypto and is keen to leave collateral and spend interest to carry out a loan.
As Reuters conveyed, to put it plainly, “Crypto lending is essentially banking — for the crypto world.” Hence, similar to banks, crypto lenders were assumed to yield profits from deposits by lending those funds out.
However, this seemingly fantastic concept proved to be an absolute nightmare. “As we learned this year, even when things go well for crypto lenders, they can quickly turn south. Volatility in the markets put pressure on crypto lenders’ normal businesses — including shrinking the number of depositors and borrowers. Faced with increasing withdrawals, many were found to have been illiquid or insolvent,” said Daniel Kuhn, Coinbase.
Kuhn continued, “But we also learned that lenders were engaging in potentially illegal behavior by re-loaning (or rehypothecating) funds they shouldn’t have or making generally ill-advised bets. For example, in a filing, Vermont’s securities regulator said Celsius at times resembled a Ponzi scheme in that it relied on attracting new investors to pay out old ones.”
“It did that by offering rewards programs tied to its token and using its marketing budget to pay yields well above standard. (The latter practice also happened at FTX’s “earn” program and the Anchor protocol, a decentralized lender built on Terra, another of 2022’s big failures.),” Kuhn exclaimed.
From Hero to Zero
The rise to fame of crypto lenders has been remarkable. But, regardless, no matter how much enormous their highest valuation is, sound fundamentals still trump everything. Unfortunately, it is the one thing that these companies below miss.
1) Genesis, a Wall Street-facing enterprise held by CoinDesk’s parent enterprise, Digital Currency Group, had roughly $2.8 billion in functional loans at the end of the third quarter of 2022 before its sudden downfall.
2) Secondly, BlockFi, which just filed for Chapter 11 bankruptcy protection, had been valued at $3 billion just last year.
3) Lastly, Celsius accrued more than $11 billion in assets on its platform before vanishing billions of pesos in days.
Ultimately, this topic may be far from over. As we speak, a handful of crypto lenders are clearly struggling and, unfortunately, might not make it to the end of the year altogether.
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