Weekly Market Report - 9th March 2019
This weekly report aims to provide an overview of the crypto markets focusing on secondary market trading. Though nothing here is investment advice, we hope this provides some useful and targeted information.
Weekly Market Report - 9th March 2019
This week’s report looks into the crypto-lending industry, focusing on the business models of top crypto-lending platforms. By comparing the unique features of each platform, readers can better understand the risks and benefits associated with these crypto-lending services.
Market Overview
This week’s new participants in the top 100 coins:
AION, ETP
Coins that dropped out of the top 100 coins compared with last week:
EURS, VERI
Rolling Returns of Top 100 Tokens by Sector
Returns of the top 100 Tokens by sector from February 7, 2019, to March 8, 2019
Returns vs Volatility
This is a look at mean and total daily returns vs volatility for the 17 sectors as well as the overall crypto and equity market. Some sectors only contain one or two coins/tokens while others have more than a dozen.
Mean Daily Return vs Volatility from February 7, 2019, to March 8, 2019
We abbreviated the names of several sectors to make it easier to view:
M = Market
DC = Digital Cash
CP/MP = Computing Power/Mining Pool
A/M = Advertising/Media
G/E = Gaming/Entertainment
C = Classics
D/GT = Dividend/Governance Token
E/T = Exchange Token
OC/I = Off Chain/Interoperability
Correlation Between Daily Returns of Each Sector
Correlation between daily returns of each sector from December 7, 2018, to March 8, 2019. Correlation ranges between -1 and 1. A correlation close to 1 or -1 means a very positive or negative relationship between the two subjects, respectively. A correlation close to 0 means no linear relationship between the two subjects.
The above figure shows the correlation between the daily returns of each sector. Correlations are very high between all sectors in crypto with the exception of stable coins and education (since the education sector only contains 1 token). Stablecoins having a 0.18 correlation with BTC and 0.17 with the crypto market is interesting to note since they are not supposed to move at all and should have near zero volatility.
Focus Spotlight — Crypto Lending Services
Despite the crypto bear market in 2018, the ecosystem has seen major developments over the past few months. As the crypto economy continues to grow, a new financial service has entered the market — crypto lending. Crypto lending, or crypto-backed loan, is a new type of service that allows crypto investors to deposit their digital asset as collateral in exchange for fiat or crypto loans. This provides traders an alternative way to obtain liquidity without having to sell their crypto assets when prices fall. On the other hand, lenders in the agreement can generate stable returns through interest payments.
As of now, there are more than a dozen lending platforms on the market. However, each follows a different strategy. Below we take a quick look at three of the top lending platforms and see how their business models vary from one another.
On top of our list is SALT Lending, one of the earliest crypto-fiat lending platforms in the market. SALT stands for Secure Automated Lending Technology. It is a token-based platform that enables users to borrow from their liquidity pool. To access the platform, users need to sign up for membership and pay fees using SALT tokens. Although a KYC process is required, SALT does not inquire users’ credit score. The lending process is similar to that of other peer-to-peer platforms, where lenders post their terms while borrowers select the one that best suits their needs. Once a loan is approved, the borrower sends collateral to a smart contract and cash is sent directly to the bank account. During the lending period, in the case that the collateral drops in value due to a decline in market price, in which the loan-to-value ratio (LTV) drops below the required rate, the smart contract liquidates the collateral to eliminate counterparty risk. Despite SALT Lending being one of the most popular lending platforms in the industry, most of its lending process runs on a centralized system. Another thing to note is that only institutional investors are qualified as lenders, which can be a major disadvantage for the average investor.
NEXO is another crypto lending platform that allows users to leverage their crypto assets for fiat. Similar to SALT, NEXO does not require credit checks but requires KYC. However, it does not use a membership structure and allow users to obtain loans by simply depositing their crypto into their NEXO wallet. Once the deposit is made, the platform automatically calculates the loan limit and interest rate. Currently, users can only take out loans while NEXO serves as the sole liquidity provider. Meanwhile, the team announced in October 2018 that investors may soon be able to lend stablecoins and earn interests. Compared to SALT, NEXO operates in many more jurisdictions and offers loans in more than 40 different fiat currencies.
ETHLend is a lending platform that operates in a fully decentralized manner. ETHLend utilizes Ethereum smart contracts to create loan contracts backed by ERC-20 tokens. Since lending is peer-to-peer, each contract is customized in which lenders decide the token types for loan and collateral as well as the interest rate and loan duration. Given that ETHLend does not hold custody of the assets, it is considered to be far more secure than other centralized services. However, a major drawback is that loans are all denominated in crypto, meaning that those who need cash will need to take another step to convert their loans into fiat.
Having introduced three of the top lending services, we compare their services in the chart below. We also include two other similar platforms for reference.
Based on the fee structures we can see that centralized services adopt different business models. Those that offer peer to peer lending such as SALT and BlockFi generate revenue through membership or loan origination fee; whereas other platforms like NEXO and YouHodler act as the liquidity provider and generate revenue by collecting interest payments. One thing to note is that for these platforms, KYC is still required as fiat needs to be transferred to users’ bank accounts. However, the need for credit scores is removed, which is different from traditional lending services.
When accessing these services, users face two types of risk - credit risk and security risks. Credit risk is when the borrower fails to make interest payments or return the principle. This is mitigated since lending platforms help liquidate the collateral if the borrower fails to make the required payments. Also, the value of the collateral is ensured by the required minimum LTV ratio. On the other hand, centralized services face security risks, which is the risk of losing users’ crypto deposits. To ensure better security, deposits are usually held by third-party custodians. For instance, NEXO entrusts users’ funds to BitGo, a qualified crypto custodian. In contrast, decentralized services such as ETHLend face little security risk as the lending process runs almost entirely on the blockchain using smart contracts.
Over the past year, although the crypto market has taken a major dive, the size of the lending market has seen major growth. Below is the digital asset lending snapshot released by Genesis Capital, a lending service firm that provides both crypto and fiat loans to institutional clients. As shown in the chart, the market has expanded continuously in 2018 and by the end of the year, the company has already originated more than $1 billion worth of loans in digital assets.
Given the relatively small size of the current market, the crypto lending industry has huge growth potential. Moving forward, we expect existing businesses to continue improving their services by offering more competitive rates and facilitating the overall lending process.
While this provides more opportunity for crypto investors to generate income through leverage and passive investments, it is important that users understand the underlying structures and the risks associated with these lending platforms before making investment decisions.
Data Source
We included data from sources such as CoinMarketCap for analyzing price movements, volatility, mean daily return, and correlations between each sector; MyToken for sector breakdown; SALT Lending, ETHLend, NEXO, BlockFi, and YouHodler official websites for lending data and business structure; and Genesis Capital for loan origination data.
Stay Tuned Here
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