Thoughts on Cryptocurrency Lending

There’s two basic models, custodial and non-custodial. The vast majority of options are custodial, and that means a third party has your coins. This entails counterparty risk.

What is a reasonable return to lend out your Bitcoin? Is 6% good? Is 15%? It entirely depends on the counterparty risk. You’re not earning money for lending out BTC, you’re earning money for lending to a specific counterparty like BlockFi.

So, what’s a reasonable yield? Junk bonds in the US have typically paid 4-6% over treasury rates. For a risky start-up, uncollateralized loans would typically be more like 15-25% over treasury yields.

Short-term treasury yields are currently 2.5%, so I’d look for ~22%+ yield to lend my BTC to a start-up at a minimum. Now, this superficial analysis is unfair to Blockfi and others who would rightly argue this isn’t a purely uncollateralized loan.

On their website, Blockfi says they “typically lends crypto on overcollateralized terms.” The specifics matter a lot here. If that collateral was legally owed to you as a specific lender, these should probably be viewed as collateralized loans. They’re probably not.

If you as the lender have no legal right to specific collateral, then you’re simply a creditor to a single company, Blockfi (or whomever else), and you might not even be a senior creditor (for Blockfi, I believe you are a senior creditor, but this should be confirmed for each platform.)

So the right way to think about making a loan on a platform like this is very similar to if a crypto start-up asked you for a loan and offered you some interest to borrow your money, and promised to keep a pile of cash representing their general obligations to investors.

Non-custodial solutions are very different. With these, you may potentially have zero counterparty risk, rather you’d be subject to some sort of liquidation risk and protocol risk. If the market gaps lower, the proceeds from liquidating collateral might not pay you back.
Additionally, using things like multisig solutions for a lending platform have serious risk of bugs. Just how serious? Ask Parity, undoubted experts on ethereum smart contracts, who twice lost tremendous sums to bugs in the simplest type of multisig smart contract.
TDLR: The growth in crypto lending markets is awesome for the ecosystem (separate topic), but is extremely risky today however it’s done, and I think the yields are far too low to price that risk from my perspective.

About Ari Paul

Ari Paul is co-founder and CIO of BlockTower Capital. He was previously a portfolio manager for the University of Chicago's $8 billion endowment, and a derivatives market maker and proprietary trader for Susquehanna International Group (SIG). Ari earned a BA in political science from the University of Pennsylvania, and an MBA from the University of Chicago with concentrations in economics, entrepreneurship, strategic management, and econometrics & statistics. Ari is a CFA charterholder.
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4 Responses to Thoughts on Cryptocurrency Lending

  1. DC says:

    Some great info


  2. Pingback: 加密借贷中的风险/回报值得吗? – DeFi News

  3. Pingback: Thoughts on Cryptocurrency Lending – Cloud Token +

  4. nancy C E. says:

    My financial institutions sent an mail to me last week requesting I key into their new program which was investing in cryptocurrency as a new beginner through their channel.This mail came at the right time I was having a conversation with my driver who told me he just made his first million dollars from Bitcoin.I have never felt guilty in my life while in the car with him.He has refused to resign and continue to work and invest.We had a phone conversation with his broker who directed me to their mail ( took me 3 hours to get signed up ,confirmed as a subscriber ,with their prediction and Bitcoin price .I foresee myself as a great investor.I really don’t want to talk about it but huge returns is all that is attached to BTC at the moment .


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