How high leverage crypto lending market collapses

As the number of crypto lending projects increases, the demand for high-quality banks in this space has also increased. However, the current market is in a tailspin and not much can be done about it. Like other asset markets, such as stock and bond trading or real estate development, the crypto lending market faces multiple headwinds: low-interest rates, rising competition, and regulatory uncertainty. Traditional lenders are unwilling to offer crypto loans at competitive rates or as a package deal. Even if they did deliver it at competitive rates, many others would reject it out of hand. This leaves traditional financial institutions as the only alternative left. To avoid becoming an antiquated sector that cannot support itself, we need more than just more conventional lenders. There needs to be a higher level of leverage on offer so that creative digital assets can become its main attraction instead of simply being another commodity – another loan option. Lenders with leveraged portfolios are necessary even if they do not have the best business practices (e.g., investment vehicles). Weakening the competition will only make things harder for traditional players who have grown accustomed to buying their way into certain industries (e.g., oil) or using other conventional means to reach their goals (e.g., banking).

What is the current crypto lending market worth?

There are over 1,000 crypto lending projects in the market. Some of them have raised more money than others and it is not unusual for projects to generate more than the sum of their (usually smaller) parts. However, the total number of lenders in the market would not be significant without the adoption of blockchain and the payment network it creates. However, the market suddenly collapses in early 2022 due to the market downturn. It makes many people wonder why the market is so fragile. 

The demand for high quality digital banks

New digital banks are opening their doors worldwide and offering loans to customers in various forms. Some common forms of lending include cash-out refinance, termite and mortgage loan, and money market funds. Other assets usually secure these loans rather than security-rated assets. They may offer higher interest payments but the risk of default is also very high.

How big of an impact will the current market have on business confidence?

The amount of money raised through these projects can greatly affect a lender’s business. If the number of lenders increases and the number of projects increases, then the number of do-it-your-self (DIY) loans will increase as well. However, the most significant impact will be on the confidence of the banks in the industry. This will have a dramatic and far-reaching impact on the entire commodities and financial services industry. There will be a loss of vendor relationships, reduced transparency, and a decline in investment confidence in banks. These will hurt all parties, from the lender company to the government. One example is the lending company Vauld. Unlike traditional lending services, crypto lending solely depends on the algorithm to determine the opportunities. It works when the market goes up but it does not work when the market goes down. When valuation goes up, the interest payments are worth less than the company holds. However, the interest payment is worth more than the company has when the market goes down. He suddenly reversed the market, putting the company out of business immediately.

What is next for crypto lending in terms of transparency and regulation?

The crypto lending market is small and has little industry publicity, meaning there is not much regulation or regulation-like regulation that could be applied. However, it would be wise to consider this market a low-hanging fruit, as most regulatory and legal developments occur very slowly in a sector that experiences massive fluctuations in demand and supply.

Bottom line

The demand for high-quality banks in this market is very large. There will be no significant movement in the market with the advent of decentralized, blockchain-based ledgers. And with the advent of more blockchain-based assets, demand for high-quality banks will continue to grow. However, a major event like a government ban on virtual currency will spark a meaningful change in the market. There is little chance of this happening soon. With so much disruption and uncertainty in this sector, it is unrealistic to predict the future of bankine. But one thing is for sure: the use of blockchain in banking will become more common, if not inevitable, in the near future.

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Photo by Jason Pofahl on Unsplash

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