In June, Federal Reserve Chairman Jerome Powell expressed his belief in the enduring nature of cryptocurrencies. This sentiment has been proven true as the collective market value of all cryptocurrencies has doubled to $1.3 trillion this year, rebounding from the previous year’s crash.
What’s even more noteworthy is the resurgence of interest in centralized crypto-collateralized finance following the controversial collapse of industry giants like BlockFi and Celsius last year.
Alexander Blume, the managing partner at SEC-registered investment advisor Two Prime, shared insights about the strong demand for crypto-secured loans since the soft launch of their lending offering on September 13. He mentioned receiving approximately $2 billion in demand for Bitcoin-secured loans.
Crypto-collateralized lending is an arrangement where borrowers provide bitcoin (BTC), ether (ETH), or other digital assets as collateral and receive their loans primarily in the form of fiat currencies. In the event of a default, the lender, typically the contractual authority, liquidates the pledged crypto assets to recover the loan amount.
These loans are usually overcollateralized, meaning the collateral’s value significantly exceeds the loan amount. This precaution is taken to safeguard lenders against potential losses resulting from a decline in the collateral’s value.
Crypto-backed fiat loans are particularly popular during bullish market trends because rising prices increase the value of the collateral. Borrowers can then use the fiat loans to acquire other cryptocurrencies or purchase mining equipment, often denominated in U.S. dollars.
This arrangement allows miners and investors to retain their crypto holdings while obtaining additional fiat funds to support their operations and yield-generating strategies.
During the 2020-21 bull markets, centralized finance (CeFi) platforms such as BlockFi, Celsius, and Voyager experienced substantial growth. However, the crypto market crash in the previous year exposed the inadequacy of risk prevention measures at these lending giants. At its peak, Celsius managed over $20 billion in assets and served more than 1.7 million users.
These firms declared bankruptcy last year, leading to the freezing of depositors’ accounts and their inability to access their funds. This situation drew the attention of U.S. regulators.
In response to the fall of Genesis, BlockFi, Celsius, and others, a significant gap in the market emerged for responsibly managed secured loans for institutions. Two Prime is well-prepared to address this gap, with a particular focus on institutional borrowers.
Approximately 85% of the fiat loans extended by Two Prime are collateralized by Bitcoin, while the remaining loans are backed by ether and other prominent alternative cryptocurrencies.
Interest rates for these loans vary based on factors such as loan-to-value ratio, duration, and size, typically ranging from 5% to 12%, according to Blume.