{"id":18765,"date":"2023-01-28T06:59:51","date_gmt":"2023-01-28T14:59:51","guid":{"rendered":"https:\/\/coinnetworknews.com\/genesis-capitals-fall-might-transform-crypto-lending-not-bury-it\/"},"modified":"2023-01-28T06:59:51","modified_gmt":"2023-01-28T14:59:51","slug":"genesis-capitals-fall-might-transform-crypto-lending-not-bury-it","status":"publish","type":"post","link":"https:\/\/coinnetworknews.com\/genesis-capitals-fall-might-transform-crypto-lending-not-bury-it\/","title":{"rendered":"Genesis Capital\u2019s fall might transform crypto lending \u2014 not bury it"},"content":{"rendered":"
Is crypto lending dead, or does it just need better execution? That\u2019s a question asked with more urgency in the wake of Genesis Global Capital Jan. 19 bankruptcy filing. That, in turn, followed the demise of other prominent crypto lenders, including Celsius Network and Voyager Digital in July 2022, and BlockFi, which filed for Chapter 11 bankruptcy protection in late November 2022.<\/p>\n
Unlike many traditional creditors, like banks, cryptocurrency lenders aren\u2019t required to have capital or liquidity buffers to help them weather hard times. The collateral they hold \u2014 cryptocurrencies \u2014 typically suffer from high volatility; thus, when markets plunge, it can hit crypto lenders like an avalanche. <\/p>\n
Edward Moya, a senior market analyst at Oanda, told Cointelegraph, \u201cThe demise of crypto lender Genesis reminded traders that there still needs to be a lot more cleaning up in the cryptoverse. You don\u2019t need exposure to FTX to go under and that theme might continue for a while for many distressed crypto companies.\u201d<\/p>\n
Echoing those comments, Francesco Melpignano, CEO of Kadena Eco, a layer-1 blockchain, expects to see \u201ccontagion from these meltdowns continue to reverberate this year and maybe the next few.\u201d<\/p>\n
Is crypto lending kaputt?<\/em> It\u2019s a question Duke University finance professor Campbell Harvey was asked lately. His answer: \u201cI don\u2019t think so.\u201d He believes the business model remains sound and there is a place for it in future finance.<\/p>\n Many traditional loans today are overcollateralized, after all. That is, the collateral provided may be worth more than the loan, which is unnecessary from a borrower\u2019s point of view and makes for a less efficient financial system. Of course, the problem with many crypto lending transactions is the opposite \u2014 they are undercollateralized. <\/p>\n However, a safe middle ground could be reached if one applies professional risk management practices to crypto lending, said Harvey, co-author of the book, <\/em>DeFi and the Future of Finance<\/em><\/a>.\u00a0<\/p>\n He believes that those bankrupt crypto firms failed to plan for worst-case market scenarios and it wasn\u2019t for lack of knowledge. \u201cThose people knew crypto\u2019s history,\u201d Harvey told Cointelegraph. Bitcoin (BTC<\/a>) has fallen more than 50% at least a half-dozen times in its short history and lenders should have made provisions for significant drawdowns \u2014 and then some. \u201cIt\u2019s a failure of risk management,\u201d said Harvey. <\/p>\n Crypto lending firms also failed to diversify their borrower portfolios by number and type. The idea here is that if a hedge fund like Three Arrows Capital (3AC) collapses, it shouldn\u2019t bring down its creditors with it. Genesis Global Trading lent $2.4 billion to 3AC \u2014 far too much for a firm its size to lend to a single borrower \u2014 and presently has a claim for $1.2 billion against the now-insolvent fund.<\/p>\n A traditional lender typically performs due diligence on a borrower to check out its business prospects before lending it money, with collateral often adjusted based on counterparty risk. There is little evidence this was done among failed crypto lenders, however. <\/p>\n What could explain this disregard for basic risk management practices?<\/em>\u00a0 \u201cIt\u2019s easy to start a business when prices are rising,\u201d said Harvey. Everyone is making money. It\u2019s simple to push worst-case-scenario planning to the side. <\/p>\n