Seeking Alpha

Why Crypto Lending Will Disrupt The Credit Market

by: Nicholas Kitonyi
Nicholas Kitonyi
Research analyst, Growth, value, long/short equity

Crypto-backed lending is growing rapidly. The amount borrowed since the industry emerged two years ago could surpass $25 billion by the year 2022.

Rapid growth has sparked fears that another credit bubble could be forming because crypto lenders do not prioritize background checks on creditworthiness.

While crypto lending works similar to peer-2-peer lending, some platforms like Cred have introduced add-on features to increase user experience.

Lending rates still remain low for most crypto assets but are improving.

Successful disruption of the credit market could play a key role in expanding the influence of the cryptocurrency market in the global financial ecosystem.

The breakout of the cryptocurrency and blockchain markets during the last decade created one of the most disruptive forces in the global financial markets. The concept of tokenization is now being applied across different industries in what blockchain enthusiasts are calling the decentralization of the financial markets. Tokenization means that nearly every asset type can be converted into digital tokens. This allows investors to use different crypto assets as collateral for loans.

Cryptocurrency-based lending platforms emerged several years later following the launch of the first crypto, Bitcoin (BTC-USD). However, the few that gained traction in the market have since been key in driving the industry growth.

There are fears of a crypto lending bubble amid rapid growth

According to a report published by CredMark in December last year, the crypto credit market had issued more than $6.4 billion in loan originations through September 2019. On the other hand, lifetime collateral issued topped $10.5 billion in under two years since the industry's emergence in 2018.

The crypto lending market is tipped to continue growing steadily over the next few years with forecast reports predicting that more than $25 billion cumulative worth of crypto loan originations by the year 2022. This growth is not without notable skeptics. Some analysts fear that we could be witnessing another credit bubble in the making.

In October last year, Bloomberg published a report pointing to the potential risks of a crypto credit bubble amid rapid growth. Due to a lack of credit checks, the fears are that more people with bad credit will use crypto-backed lending platforms in the coming years. If cryptocurrency prices were to suddenly plummet, then this could cause a burst.

In hindsight, as more cryptocurrency investors use their crypto assets to access credit financing, this could disrupt the global credit market.

The diversity of crypto lending

Most crypto-lending platforms focus on creating a peer-2-peer type of platform where cryptocurrency investors can borrow by using their crypto assets for collateral from fellow crypto investors. Some platforms allow owners of bitcoin and other cryptocurrencies to state the terms under which they would like to borrow money. The lenders asses the terms on offer from different borrowers and then pick which ones to lend money to. The collateral provided must cover the amount borrowed plus interest based on the prevailing price of the cryptocurrency asset.

But the market is evolving quicker with every provider looking to offer some innovative features to users. Recently, platforms like Cred have introduced more revolutionary services that could attract more investors in the crypto lending industry. Last year, the company received lots of plaudits after it introduced a point-of-sale system, supply chain lending, and interest payment flexibility.

The California-based crypto lender has been making more strides this year after too. Litecoin (LTC-USD) Foundation, the parent of one of the most popular cryptocurrencies announced they had partnered with Cred to provide financial services to Litecoin investors. This will allow Litecoin owners to earn and borrow from the rapidly growing crypto lending market. The company offers a return of up to 10% to lenders, and it supports 30 digital assets.

Alan Austin, director of the Litecoin Foundation was full of praise for the partnership. He said that "In addition to Litecoin's reliability, use for payments and excellent liquidity, the ability to earn interest at attractive rates through Cred's platform further strengthens this use case."

Cred's flexible interest rates and add-on features were also lauded by Cred Co-Founder and CEO, Dan Schatt, a former executive at PayPal. He said Cred looks "forward to supporting the millions of Litecoin wallet holders with a more transparent, equitable set of financial services we have built, thanks to the advancement of blockchain technologies." These differentiative features will help the company to be more competitive in the market.

Industry giants like SALT Lending (SALT-USD), Celcius Network, Genesis, and BlockFi have established a strong customer base and already support several crypto assets. For instance, SALT focuses more on borrowers while BlockFi targets both lenders and borrowers. The platforms also provide different interest rates for different crypto assets with fiat/stablecoins lenders reaping the highest returns.

Cryptocurrency lending rates 30-day average

Cryptocurrency lending rates (image capture via

Average interest earnings are improving

Since the emergence of crypto-lending platforms, lenders have been earning an average of 6% in interest according to the report published by CredMark. This is significantly better than 4% reported three months earlier. It also beats what most fixed income instruments offer in return.

However, it is still significantly lower than the average returns from low-risk mutual funds. Some investors might use this as a reason not to invest in crypto lending in which case they would be missing the point. While crypto lending platforms allow users to borrow fiat and stablecoins, the primary goal is to allow the collateralization of crypto assets.

Therefore, unless traditional mutual funds begin accepting crypto assets as collateral, crypto lending platforms will continue to experience tremendous growth. The cryptocurrency market is now becoming an exclusive financial ecosystem that supports nearly all the services that traditional banks have to offer.


In summary, crypto-backed lending appears to be making huge strides in the credit market. This is important both for cryptocurrency investors and the crypto market as a whole. Crypto investors can now access cash tied to their crypto assets without necessarily selling their cryptocurrencies. This can be important especially when cryptocurrency prices are falling.

On the other hand, if crypto lending platforms successfully disrupt the credit market, this will expand the impact of the cryptocurrency market in the global financial ecosystem. Crypto lending will add another important service from the mainstream to the growing catalog of crypto-backed services.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.