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Licensed services for issuing loans and attracting investments in cryptocurrency (CeFi), showed abnormal business growth in 2020. Compliance with kyc / AML standards made it possible to attract funds from institutions that are several times higher in terms of investment volumes of retail investors, who could be scared off by mandatory verification and financial reporting of CeFi to the fiscal authorities.
The BlockFi business grew by 1711% for 2020, Nexo and Celsius increased turnover by 1900% in this span.
In 2021, the listed companies declared the size of assets of $ 14.7 billion, $ 12 billion and $ 20 billion Institutional investors, on the one hand, were attracted by the high profitability of cryptocurrency and dollar (in stable tokens) deposits. On the other hand, the rapid development of crypto derivatives and the growth of cryptocurrencies provided an increased demand for CeFi loans.
Leading platforms BlockFi and Celsius offered the investor to earn up to 6.25% per annum on BTC hold, for dollar investments in USDT and DAI, the profit rate reached 8.5%. The traditional banking system offered 2% in dollars in pension special accounts, ordinary deposits went lower.
CeFi gave away most of the income from credit interest, which was even higher than investment interest but beneficial to the institutional borrower. At the beginning of 2021, the trading volumes of crypto derivatives were several times higher than spot trading, which led to an increase in the rate of futures, especially the “distant” expiration dates.
Institutions used the loan for arbitrage, selling “long-distance” futures with a higher rate and simultaneously occupying spot BTC. The rate of both assets equalized at the time of expiration, allowing you to earn a difference (contango) without risk and close the loan.
The chart of Skew analysts shows that at the beginning of 2021, arbitrageurs earned up to 100% per annum on bitcoin contango.
The curve clearly demonstrates the reasons why CeFi is deprived of the main advantage. Contango shrinks with the fall of cryptocurrencies and arbitrageurs become unprofitable for cryptocurrency loans. As a result, the leading platforms are forced to “severely cut” the percentage of Bitcoin profitability.
BlockFi reduced payments to three and one percent per annum by amounts up to 0.35 BTC. Celsius offers customers 3.05% for staking the main cryptocurrency. A smaller reduction is observed in stablecoins, where rates now fluctuate within seven percent. Cryptodollars are more of interest to market makers who continue to work on the spot to maintain the course.
In the wake of the UST case, stablecoins came under scrutiny from regulators internationally. As soon as there is a legislative framework for their regulation, this asset will appear in banks, and the percentage of profitability will be limited. CeFi will have only one advantage – loans and deposits in cryptocurrency, whose low percentage of profitability will not be of interest to most traders.
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