Crypto businesses are betting big on lending amid the market downturn with yield products that offer modest annual returns on their customers' dollars - at least by the industry's high standards
Converting borrowed dollars into more dollars is nothing new in the crypto world, with myriad decentralized financial protocols (DeFi) luring stablecoin holders with a handful of basis points. Terra's recently imploded Anchor offered 20% returns, obtained through opaque means.
By contrast, the new yield products generate their returns via "rational" rails, said Matt Hougan, chief investment officer at Bitwise, which is launching a "USD Income Fund" that lends investors' dollars to counterparties like Coinbase and Gemini (which then lend them to the stablecoin market) to generate 4% to 8% returns.
"You can look at us as an aggregation point for cash entering this market," Hougan said in a phone call. "There is significant demand for cash in the crypto economy." He said some of that pressure comes from the void typically filled by traditional lending institutions unwilling to lend to a risky industry.
In the short term, that mismatch could prove extremely lucrative for lenders willing to take some of the risk. Their dollars can make a lot more difference in the crypto economy than they can in their nearly interest-free savings accounts, especially in the face of inflation.
"People are forced to look for yield," Hougan said, and that's prompting fund providers to innovate.
Yield hunters
European crypto issuer 21Shares' USD Yield ETP (USDY), with a target yield of 5%, is the latest development. Listed on the Swiss stock exchange SIX on Wednesday, the fund plans to lend each dollar invested for $1.10 to $1.50 in bitcoin (BTC) and ether (ETH) as collateral - a sort of insurance policy in case the borrower goes bust.
"So if the counterparty goes bye-bye," explains President Ophelia Snyder, "we can just knock on the custodian's door and say, 'Hey, they're gone. Give us our money back.'"
Snyder said 21Shares plans to lend investors' assets to BlockFi.
The risk of imploding crypto counterparties became clear earlier this month when algorithmic stablecoin terraUSD (UST) and sister token LUNA went into a death spiral. One of the big draws of this troubled ecosystem was the horrendous but unsustainable returns of terra's anchor protocol.
Terra's debilitating yield schemes have little in common with USDY, Snyder said. For starters, USDY takes collateral to protect its investors against counterparty default. That may limit return opportunities, but it's done in the name of "risk-adjusted" returns. In their view, this is a worthwhile trade-off for investors who are buffeted by market forces.
"Virtually every type of financial product on the market right now is negative. Holding cash has a negative real interest rate. And that's a really important realization," she said. "This product is particularly well suited against that backdrop."