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Welcome to Crypto Long & Short! This week, Nonco's Jeffrey Howard argues that the U.S. election will bring crypto further into mainstream political debate.
Then, Craig Birchall, at Membrane, says that the crypto lending market is coming back after the collapses of 2021-22, but this time with greater compliance and control. As always, get the latest crypto news and data from coindeskmarkets.com. – Ben Schiller, head of Consensus Magazine at CoinDesk
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Can Crypto Sway the U.S. Election? |
As the U.S. election approaches, political polarization is once again front and center. The country remains deeply divided, with the electorate split nearly 50/50 along party lines. The presidential race is shaping up to be too-close-to-call, especially with the recent resurgence of the Democratic ticket. The outcome will have significant implications for the future of the digital asset industry.
Which raises an important question: Is the cryptocurrency sector influential enough to sway the election? The answer appears to be "yes." Elections are won by money and mobilization, not just by ideas. That's the reality of the political landscape. Politicians can be influenced, if not outright bought, and this election cycle marks the first time the crypto industry has a well-funded, organized lobby to support its interests. Crypto-focused Political Action Committees (PACs) have raised $183 million to influence the 2024 elections, according to followthecrypto.org. Major players in Silicon Valley are seizing this opportunity to use their wealth and influence to shape future policies on digital assets and artificial intelligence. Donald Trump, the Republican nominee, has welcomed these efforts, pledging strong support for the crypto industry. His proposals include revamping U.S. energy policy to position the country as a global leader in Bitcoin mining, ending "Operation Chokepoint 2.0," removing Gary Gensler as SEC Chair, and even creating a national strategic "reserve" of Bitcoin. The crypto industry has responded enthusiastically, pouring money into his campaign. Whether he follows through on these promises remains to be seen. On the Democratic side, the nominee has been largely silent on crypto, though the current administration's aggressive crackdown on the industry has left many skeptics. Many Democrats now acknowledge that SEC Chairman Gensler has become a political liability, and that young voters in a few crucial swing states will influence the outcome of the election. So why has the future of crypto regulation become such a hot-button political issue? The answer again is simple: money. Not just the large sums being funneled into this election, but the growing institutional interest in the industry itself, spurred by the advent of Bitcoin and Ethereum ETFs. Larry Fink, Chairman and CEO of BlackRock, the world's largest asset manager, has emerged as a leading advocate, touting the benefits of Bitcoin and blockchain technology. The crypto industry has evolved significantly, with over 50 million Americans owning digital assets. Crypto has always been inherently political, challenging the very foundations of centralized markets. The principles of decentralization, transparency, financial inclusion, autonomy, and ownership have far-reaching implications for all aspects of our financial lives. Politicians tend to follow the money, and voters often cast their ballots based on economic self-interest. The American penchant for libertarian ideals is now intersecting with the fight for the future of digital assets. The political climate is increasingly favorable toward sensible regulations, with numerous crypto-friendly bills circulating on Capitol Hill. Could this election finally propel crypto into the mainstream? Given the stakes, it certainly seems possible. In this context, being a single-issue voter isn't unreasonable, especially if your financial future is on the line. However, it's worth considering whether this could turn into a classic case of "buy the rumor, sell the news." |
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After 2022's Bust, Scars Are Healing In Crypto Lending |
In 2022, the crypto lending market had collapsed after a series of devastating events including the fall of LUNA/UST, the insolvency of Three Arrows Capital, and the FTX bankruptcy. Many key lenders that provided a substantial share of the lending market's volumes were forced to close their doors after this period including BlockFi, Celsius, Voyager, and Genesis. However, one of the few silver linings coming out of this period was that it exposed the many issues that existed within the market structure and provided a blueprint for how to build a healthier ecosystem in the next cycle. The crypto lending market had peaked in 2021-2022 amid outsized crypto returns and years of low-interest rate environments. With loan defaults uncommon in bull markets, and investors clamoring for top-line growth, many crypto lenders found themselves in a race for absolute yields with risk-pricing and portfolio health being a secondary concern. Increasing competitive pressures on structure/terms led to a proliferation of unsecured lending, relaxed underwriting/diligence standards, and growing allocations in high-yield DeFi strategies. This highly-levered environment became a tinderbox when a few bad catalysts brought everything down. Two years later, the market looks very different and we are finally starting to see strong signals of recovery. Catalyzed in part by the launch of Bitcoin ETFs in the U.S. in January, institutional lenders have seen rapid expansion in 2024. Some examples of this from publicly reported data can be seen below: |
- Coinbase Prime's financing business reported that its loan book increased +75% QoQ from $399mm to $700mm in 1Q24
- Ledn, a crypto lending platform, publicly reported $584mm of institutional loans issued in 1Q24, a +400% increase QoQ
- Membrane, a loan technology provider (and my employer; full disclosure), reported that the first-half of 2024 saw 3x the loan bookings of the full-year 2023
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Risk Management Practices Lenders are placing a heavy emphasis on risk management, keen to not incur loan losses and maintain the trust of their counterparties. In a stark contrast to 2021, detailed entity diligence and verification of assets are now standard onboarding practices. Over-collateralized lending has become the dominant share of loan activity and many borrowers are insisting that their collateral be held in tri-party with a custodian. A much smaller share of the market, unsecured lending is now typically restricted to specific well-capitalized borrowers and often includes structural protections and/or ongoing monitoring requirements. Transparency has also been a focus as many lenders, and their capital providers, are demanding visibility to monitor their borrowers' use of loan proceeds while many borrowers will demand an ongoing line-of-sight into the wallets where their collateral is held. New Participants & Innovative Technologies The growth of new lenders coming to market may now be greater than at any point since 2021. Swiss banks, such as Sygnum, Amina, Dukascopy and others, have gradually entered the market and other large institutions from traditional financial markets are also moving into the space as exemplified by Cantor Fitzgerald's announcement of a new Bitcoin financing business with $2B in initial funding. These new entrants will be able to both supply capital to the broader trading community as well as to crypto's existing lenders, ultimately driving a more robust and liquid market. Large custodians like BitGo and Copper have leaned into prime financing businesses, many new credit funds have launched in the APAC region, and several ETF issuers are actively exploring how to deploy their assets to generate yield. Improved tools for loan and collateral management have empowered many of these lenders to mitigate risk and expand their product offerings. A prime example of this is the lending platform Trident Digital that has built products for offering leverage to trading firms without ever requiring funds to come off-exchange, providing traders the benefit of capital efficiency while lenders always remain over-collateralized. From more efficient risk-based margin capabilities to visibility into use of loan proceeds, institutions now have a wider range of tools at their disposal to reduce counterparty risk and increase confidence in transacting with new partners. The sustainability of crypto financing and its continued growth hinges on balancing innovation with risk management. Prudent risk management practices paired with tools that provide transparent, secure, and efficient lending services are critical to building a robust and efficient crypto lending market. |
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Here's some news worth knowing, from Nick Baker, CoinDesk's deputy editor-in-chief: |
- TRUMP TRADE: It got easy for a while there to spin a narrative about crypto prices and Donald Trump. The Republican presidential candidate started saying pro-crypto things, signaling that if he wins the election in November, the U.S. will become far friendlier to digital assets. And, pretty clearly, crypto folks started pinning their hopes on that scenario. Meanwhile, bitcoin soared beginning in mid-July after the assassination attempt on Trump seemed to improve his odds of winning. Then, Joe Biden dropped out of the race, Kamala Harris stepped in and bitcoin appeared to slump as Trump's chances worsened. That's how it looked, anyway. FalconX actually crunched the data and found it might just be a myth. The prime broker plotted bitcoin's (BTC) price against Trump's odds of winning on Polymarket's prediction market. Turns out, according to FalconX, there was no clear correlation between Trump sentiment and the cryptocurrency's price. "One reason for these weaker-than-expected relationships could be the many crosscurrents influencing prices, such as the path of monetary policy in the U.S., concerns around upcoming supply overhangs, and others, as we highlighted before," David Lawant, head of research at FalconX, said in an email to CoinDesk's Omkar Godbole.
- KING OF CRYPTO (ETFS): For years, Grayscale was the king of crypto asset management. Its trusts held large stashes of bitcoin and Ethereum's ether (ETH) – a pretty popular way for folks who didn't want to directly own crypto to nonetheless get investment exposure. Grayscale long sought to convert them into ETFs. That finally happened this year, as you probably already know. But the incumbent was not alone. Others got their own bitcoin and ether ETFs approved in the U.S., too. You've probably heard how popular those have been, with billions of dollars of money flowing into those new products. BlackRock has been the big winner, and its bitcoin and ether ETFs now, for the first time, have more assets under management than Grayscale's equivalent products. There's a new king. It's no real surprise, really, given BlackRock's dominance throughout the asset management business.
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