‘Too Much’ Bitcoin Supply Is In Search of Yield Reveals True Inherent Yield on Crypto Assets
Decentralized Finance (DeFi) continues to attract not just degens and crypto enthusiasts, but as we have been seeing, government authorities are also getting interested.
As we reported recently, the US Federal Reserve published a paper on DeFi, and now the Fed is interested in knowing more about the revolutionary and burgeoning sector that, according to the crypto market, could one day in the future replace banks and traditional finance.
“Today, I had the opportunity to present DeFi and Compound Finance to the Federal Reserve staff. Eventually, the banking system will run on shared, open ledgers. Each day, we get closer,” tweeted Robert Leshner, founder, and CEO of lending protocol Compound.
An increasing number of cryptocurrency firms are also offering banking features.
This week, Abra announced the launch of its new crypto banking feature, Abra Borrow, that will enable customers on the Abra Mobile App globally and in 35 U.S. states to borrow against their crypto holdings.
“Abra already has a critical mass of over 1,000,000 users, and we’re excited to roll out our new Borrow feature by popular customer demand,” said Bill Barhydt, Founder, and CEO of Abra.
“By allowing people to borrow US dollars against their digital assets, users can immediately tap into their crypto price gains without selling their crypto or forgoing future price gains.”
What’s the Point?
Amidst this growing interest in banking features, BlockFi made waves in the industry by slashing the interest rates so much that the rate on the highest amount of BTC and ETH has been brought down to the rates offered by the banks.
This has the community dragging BlockFi through the mud and arguing what's the point of lending your crypto assets for such a meager amount of rates.
“Blockfi is now reducing their yield on BTC in ranges down to 0.5%. I can make more money from my non-custodial Lightning nodes than I can with them, and peers don’t even send me complaints if I fund a channel via a CoinJoin. I’ve pulled my BTC from BlockFi and reallocated it to LN,” commented Alex Bosworth, Lightning infrastructure Lead at Lightning.
It was “Long Overdue”
BlockFi had clarified that it is because of the market conditions, the supply and demand of the lending in crypto.
Matthew Ballensweig, the head of lending at competing firm Genesis Trading, who previously worked at Bridgewater Associates, also chimed in on BlockFi’s defense, saying,
“Crypto rate markets, like most markets, aren't static. BlockFi cutting rates is just a supply/demand lever. There is simply too much BTC supply in search of yield relative to institutional demand for that BTC.”
He explained that Bitcoin “borrow demand is a function of the risk-adjusted return opportunities in the market and right now they are limited.”
Not only is public shares vs. private placement arbitrage backward, but futures markets are also in heavy contango. With limited ways to deploy BTC, the yields are contracting fast.
— skew (@skewdotcom) March 26, 2021
“You either grow your user base by offering generous yields on assets, or you focus on profitability and optimize your business for net interest margin,” he said. It was basically inevitable and “long overdue,” and these rates, according to him,
“represents a much truer picture of the inherent yield on crypto assets in this market.”
While the BTC deployment opportunities would arrive as markets ebb and flow, right now, “it pays to have cash in this market, not crypto,” he added.
Fiat-Backed Cryptos Leading
That is why Ballensweig doesn't see the same drop in stablecoin rates coming as Bitcoin BTC -1.01% Bitcoin / USD BTCUSD $ 47,572.23
-$480.48-1.01% Volume 32.22 b Change -$480.48 Open $47,572.23 Circulating 18.82 m Market Cap 895.2 b 1 h $1.5 Trillion Asset Manager Franklin Templeton Eyes Crypto With Latest Filing 2 h AMC Entertainment to Accept Bitcoin, Ether, and other Cryptocurrencies as Payment 4 h Skybridge Capital Announces Intentions For Algorand (ALGO) Crypto ETF and Ethereum ETH 0.78% Ethereum / USD ETHUSD $ 3,569.67
$27.840.78% Volume 20.07 b Change $27.84 Open $3,569.67 Circulating 117.55 m Market Cap 419.62 b 1 h $1.5 Trillion Asset Manager Franklin Templeton Eyes Crypto With Latest Filing 2 h AMC Entertainment to Accept Bitcoin, Ether, and other Cryptocurrencies as Payment 4 h Skybridge Capital Announces Intentions For Algorand (ALGO) Crypto ETF ; it’s the opposite, actually. Cash provides you with leverage and the ability to capture the basis between BTC futures and spot markets.
“You can take your cash or USDC and long spot, short June BTC future and capture roughly 22% ann implied on FTX Official right now,” he stated.
However, according to data provider, Skew, demand for stablecoin borrowing is cooling off after seeing a big spike in Feb.
Stable coin borrowing demand is cooling off pic.twitter.com/Rwk1rwNxhr
— skew (@skewdotcom) March 25, 2021
Stablecoins gained traction during the pandemic last year. Demand for them spiked “as crypto users sought to safely park their assets. Then, as markets rallied, the DeFi sector jumped even higher, buoyed by blockchain-based borrowing and lending protocols,” which allowed crypto users to earn eye-popping interest rates on their crypto assets, noted Binance CEO, Changpeng Zhao.
Borrowing and lending protocols that drove the DeFi boom is what offers “an even brighter future for the wider DeFi ecosystem,” he said.
Aiming to defy traditional finance, with its high costs and inefficiencies, “these borrowing and lending protocols offer a proof-of-concept that showcases DeFi’s disruptive potential—and enduring appeal,” Zhao added.