Onchain Collateral: A Superior Choice for Crypto-Backed Loans
The landscape of crypto-backed lending is evolving, with institutions like Sygnum advocating for onchain assets as the preferred collateral. Fabian Dori, Sygnum‘s chief investment officer, recently emphasized the benefits of using direct tokens, such as Bitcoin (BTC) or Ethereum (ETH), as opposed to exchange-traded funds (ETFs) for securing crypto loans. This preference stems from the inherent liquidity and accessibility offered by onchain assets, ultimately translating into more favorable terms for borrowers.
The Advantages of Direct Token Holding
The primary advantage highlighted by Dori is the ability to execute margin calls around the clock. With onchain assets, lenders can react swiftly to market fluctuations, ensuring the security of their loans. Consider the scenario of a market downturn occurring on a weekend. If the collateral is an ETF, the lender’s ability to liquidate the assets may be hampered by market closures. Onchain collateral, however, allows for 24/7 access, mitigating risk and providing a more responsive lending environment. This also potentially allows for higher loan-to-value (LTV) ratios, meaning borrowers can access more capital relative to the value of their collateral.
LTV Ratios and the Borrower’s Perspective
Loan-to-value ratios are a critical metric in the crypto lending space. A higher LTV allows borrowers to unlock more capital, which is often a key factor for those seeking to leverage their crypto holdings. However, it’s crucial to understand that higher LTV also implies greater risk for both the borrower and the lender. Borrowers face a higher risk of liquidation during market volatility, while lenders need to carefully manage their exposure. The choice between a lower LTV with greater safety, versus a higher LTV with greater reward, represents the borrower’s risk tolerance.
The Rise of Crypto Lending and Institutional Adoption
The crypto lending market experienced significant turbulence during the 2022 bear market. However, the sector is currently rebounding, fueled by increasing institutional interest and the wider acceptance of crypto assets. The recent listing of Figure Technology, a crypto-backed lending company, on the Nasdaq exchange, and JP Morgan’s consideration of offering crypto-backed loans, represent significant milestones in the integration of crypto within traditional finance. These developments indicate a growing recognition of the potential of crypto-backed lending and its ability to reshape the financial landscape. As adoption spreads, the industry must prioritize transparency and risk management to thrive.
Looking Ahead
While crypto-backed loans are still in their early stages, they hold significant promise. The ongoing shift towards onchain collateral highlights the industry’s focus on efficiency, liquidity, and risk management. As the market matures, borrowers can expect to find innovative products. The development of a robust crypto-backed lending ecosystem, underpinned by sound risk mitigation strategies, will be key to its long-term success. This evolution will not only benefit individual borrowers but also contribute to the wider acceptance and integration of digital assets within the global financial system.
