Crypto Lending: An Estimated 625,000 BTC Are Used as Collateral
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Crypto Lending: An Estimated 625,000 BTC Are Used as Collateral

With $30 billion worth of Bitcoin engaged as collateral, is crypto lending strong enough to disrupt the mainstream?
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

According to the data compiled and presented by Arcane Crypto in one of its latest reports, nearly $30 billion worth of BTC was found to be in use as collateral in the crypto market. In terms of absolute numbers, the value was equivalent to 625,000 Bitcoins in total. These bitcoins are reportedly held as collateral in the DeFi derivatives market. 

While $30 billion worth of collateral in the form of BTC is undoubtedly a significant number, is it as notable when looked at in comparison with the overall collateral market worldwide? Is it enough to indicate that crypto lending is firmly on its way to occupy a substantive volume of the overall lending industry? These are some questions that we need answers to. 

Bitcoin Within the Global Collateral Market Explained

According to some of the latest available estimates, the size of the global collateral market is estimated to be nearly $20 trillion. While this market comprises a wide variety of collateral product types, studies suggest that government bonds and cash-based securities have a clear-cut dominance over this market. 

When we see the Bitcoin collateral market against the global collateral market, 30 billion US dollars form a mere 0.15% of a market worth 20 trillion US dollars. But, absolute percentage-share data might not give you the full picture of what is waiting for you in the long run. 

Here, we would have to keep in mind that it is not about where the DeFi market stands at present. It is about how fast the DeFi market has managed to expand. Secondly, there are robust reasons that are driving this unprecedented surge in the crypto finance economy. These reasons have much to do with the inherent flaws of the traditional lending industry. 

How Much BTC is Used as Collateral?

On March 15th, 2020, the DeFi market was hovering around a total capitalization of $151 billion. On February 22nd of this year, not even a full year later, the market reached a capitalization volume of nearly $1.7 trillion. Within a year, between the beginning of 2020 and 2021, the total value locked in DeFi Protocols witnessed a mammoth growth of 2,000%

Crypto lending with Bitcoin as collateral reflected this growth as well. According to the data published by the crypto credit data company Credmark, the growth in Bitcoin numbers used as collateral has been phenomenal. 

The period between Q4 2019 and Q4 2020 witnessed an addition of 213,000 new BTC as collateral. Between Q4 2020 and the beginning of March 2021, the number accelerated at an even faster rate to reach 625,000 from 420,000. It shows that even though crypto lending still occupies a minuscule share of the broader lending market, its growth is more than enough to take it to a significant level in the next five years or so. 

Flaws in Traditional Lending

This sort of growth can only be sustained if the introduction of crypto lending manages to resolve some of the structural faults of the traditional lending system. Has crypto lending managed to fill in such internal lacunae of the lending economy? Well, the answer is, yes—in large part, it has. 

Over the years, the problem of rehypothecation or reuse of collateral has reduced the risk withstanding capabilities of these assets by a significant margin. It has resulted in financial instability and a lack of trust in the existing lending market. 

In the crypto economy, we see peer-to-peer exchanges through self-executing smart contracts and the introduction of publicly available ledgers, i.e. blockchains. This enables everyone to verify each transaction, and have freed lending from counterparty and credit risks. 

Bitcoin is also borderless and can be traded and transferred anywhere around the globe anytime and at almost no cost. Such hassle-free portability is making Bitcoin exciting collateral to work with. Whether these qualities will be enough to disrupt several centuries-long lending industries – that only time will tell. But, it is beyond doubt that crypto lending is making its presence felt.  

Do you think that crypto lending, with digital assets as collateral, will soon become a substantive subset of the lending economy? Let us know your opinion in the comments below.

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