• Crypto lending is recovering, driven by rising Bitcoin prices and market optimism.

• The introduction of Bitcoin ETFs has influenced lending and credit conditions, boosting the market.

• Digital asset loans provide non-taxable borrowing options, offering significant advantages over selling.

More than two years have passed since the credit crisis triggered by the collapse of the Terra Network swept through the crypto market, taking down companies such as Voyager, Celsius Network, and BlockFi and damaging the industry’s reputation among smaller investors.

However, signs are emerging that this market corner is beginning to revive. Bitcoin is up more than 50% this year despite a patchy past three months.

Last weekend, Howard Lutnick, the hard-charging boss of US brokerage Cantor Fitzgerald, announced at a Nashville conference attended by Donald Trump that he planned to launch a bitcoin financing business.

If the demand existed, it would lend an initial $2 billion, rising in a further $2 billion tranches. Meanwhile, Ledn, a lender serving former Celsius borrowers, said it had processed more than $1.16 billion in digital asset loans in the year’s first half.

Crypto Lending: Crypto Brokers Get into Prime Positions for a Rebound

“Crypto credit conditions often track crypto enthusiasm and pricing, and when people are more optimistic, they want to use more leverage,” said Mike Novogratz, chief executive of crypto financial services company Galaxy Digital, on an earnings call this week. This rebound in lending is markedly different from the pitch that the likes of Celsius and Voyager made before their demise.

Two closely related factors have brought the issue of credit and lending back into the market: the arrival of US spot bitcoin exchange-traded funds (ETFs) in January and the subsequent rally in the bitcoin price.

The bitcoin ETFs have meant issuers and their agents need to buy and sell vast quantities of bitcoin to ensure the value of the ETF matches the value of the asset it is supposed to track.

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Insights into Bitcoin Financing and Its Resurgence

Credit and capital remain weak in the crypto market, as trades must be pre-funded, rapidly consuming available capital. Ledn noted that $969 million of its loans were to institutional investors, of which “several hundred million” were to ETF market makers. Additionally, crypto holders desire to see their assets put to work while waiting for their value to increase.

“We have plenty of people who have created a bunch of crypto wealth but don’t want to lose their crypto and so will borrow dollars against it,” said Novogratz. Bitcoin cannot be staked like Ether, but it can still be used in other ways. “Borrowing against digital assets is typically a non-taxable event, which may offer a significant tax advantage over selling digital assets in many jurisdictions,” added Ledn.

Digital Asset Loans: Revolutionizing Access to Capital

The mix of lending, credit, and tax services means that what is emerging among market intermediaries is a crypto version of prime brokerage, a massive driver of profits for big Wall Street banks.

A prime broker typically arranges services for hedge funds, high-speed traders, and family offices, such as extending credit, financing trades, storing assets, or even trading on behalf of customers.

Investors in crypto markets have few of these efficiencies—dedicated crypto brokers are scarce, and few have the full suite of services available. Cantor appears to be offering a solution as a prime broker, collaborating with a few Bitcoin custodians.

Comfortable handling high volumes beyond Celsius, Cantor boasted about managing $10 billion in tether redemptions in 2022 “as no big deal for us” because it dealt with trillions of Treasuries.

Prime Brokerage in the Crypto Sphere: A New Frontier

The biggest problem is the balance sheet size available from smaller crypto prime brokers, such as Hidden Road and FalconX. Galaxy said its GalaxyOne prime brokerage was servicing assets with a market value of more than $1.3 billion. Mainstream banks are prevented by regulation from diving headlong into crypto.

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Global rules, such as Basel III and the US’s controversial SAB 121 standards, have made it economically very difficult for banks to hold crypto on behalf of clients in any substantial amount. However, that’s not an issue for companies that are not regulated like banks.

Once launched, Novogratz expressed hope that the prime business would “turbocharge” his lending business. “I would hope that 12 months from now, 24 months from now, it’s one of our biggest businesses,” he said.

The Emergence and Future of Ether ETFs

After the 2008 financial crisis, regulations constrained banks from lending from their balance sheets and trading their capital as before. As the buy side grew and hedge funds and asset managers mushroomed, independent trading companies such as Citadel Securities and Jane Street thrived as intermediaries.

Crypto may or may not grow in acceptance where the world’s largest asset managers and sovereign wealth funds devote a few percent of their portfolios to bitcoin and ether. But if it does, the big Wall Street banks may find it difficult to dislodge those with a head start.

Grayscale recently spun off 10% of the existing assets in its bitcoin ETF, about $1.8 billion out of $18 billion, into a “mini” ETF designed to compete on price. Grayscale also launched a mini Ether ETF last month, and the inflows have helped offset the notable outflows from Grayscale’s leading Ether ETF.

The Impact of Key Players and Industry Leaders

The US arrested and charged Nader Al-Naji, a former Princeton graduate known as “Diamondhands,” with wire fraud and civil securities violations after raising $257 million from unregistered offers and sales of BTCLT, a crypto token linked to the social media site BitClout.

The Securities and Exchange Commission alleges Al-Naji spent over $7 million of investors’ money on items such as rental payments for a Beverly Hills mansion and cash gifts of at least $2.9 million to family members.

Bybit, the cryptocurrency exchange, announced it would leave France later this month “in light of recent regulatory developments from the French regulator.” The AMF, the French watchdog, blocked the company in May for non-compliance with existing French regulations.

Conclusion: Prospects and Challenges in the Crypto Market

Despite the challenges and uncertainties, the crypto market shows signs of resilience and potential for growth. The resurgence of crypto lending, bitcoin financing, and digital asset loans highlights the industry’s evolving landscape.

The emergence of prime brokerage services and Ether ETFs further underscores the shifting dynamics and opportunities in the crypto sphere. Key players and industry leaders continue to shape the market, navigating regulatory hurdles and leveraging innovative solutions to drive progress.

While the road ahead may be complex, the crypto market’s prospects remain promising for those who adapt and seize the opportunities.