As the price of bitcoin last year cratered, falling 83% and erasing $250 billion in market value, one company has secretly been making a killing with some rather unusual business transactions. Selling to a paradoxical mixture of bitcoin believing crypto entrepreneurs and hedge funders out to profit off what they hope is the demise of cryptocurrency, bitcoin lending firm Genesis Global Capital last year originated $1.1 billion in cryptocurrency loans, according to a report released today.
Charging interest rates that ensure its pockets get lined regardless of whether or not a customer loves or hates crypto, the company is leading the way as a rising tide of crypto startups compete to stay cash positive in this epic bear market.
“It should be possible for people to go long and short bitcoin,” says Genesis Global Capital CEO, Michael Moro. “It can’t just be a long only market. It should be perfectly okay to take the other side, to think that prices are going to fall, and to make that short bet.”
Genesis passed the billion dollars in bitcoin loans milestone on December 14, 2018, less than three months after announcing it had crossed the $500 million mark since it launched in March 2018. To put that another way, Genesis made another $500 million in bitcoin loans over just the last quarter of 2018.
As the price of bitcoin fell 39% over the last two months of the year, Genesis actually experienced its busiest period so far. New hedge funds and trading firms utilizing “spot” borrow, combined with new business including crypto collateral—and even the occasional traditional cash loan in exchange for crypto collateral—increased Genesis’ active loans outstanding to $153 million, up from $23M in Q3 2018.
Interest rates on the cryptocurrency loans range between about 10% and 12% for highly liquid cryptocurrencies like bitcoin, depending on how risky Genesis deems the way the customer plans to use the loan. The less liquid the cryptocurrency the higher the starting interest rate.
The massive jump in loan originations was “jumpstarted” by a 16% drop in the price of bitcoin on November 14, as a result of interest from short sellers looking to profit off the drop. Five-year Genesis customer, and cryptocurrency investor Brian Kelly sees this kind of transaction activity as crucial to the health of the cryptocurrency ecosystem. “Having an active two-sided market should help liquidity improve overall,” he says.
But not everyone shorted crypto. In fact, Moro says that only about 11% of bitcoin loans were used to bet against bitcoin’s rising price. Instead, he says the most popular use of bitcoin was for companies like bitcoin ATM firms that need to take short-term possession of bitcoin, which accounted for 50% of all loans, followed by those using the cryptocurrency to make money by buying on one exchange, then selling on another at a higher rate, a process call arbitrage.
Bitcoin was the most frequently borrowed cryptocurrency, comprising 75% of all the originated loans. Ether (ETH) and XRP were the second and third most frequently borrowed cryptocurrencies, with ETH borrowing more than doubling since Q3 but still comprising less than 10% of the total loan book. XRP composition since Q3 is down 50%, which Moro attributes to the cryptocurrency’s relative strength over that period. Collectively, the concentration of loans outside the top three decreased as a result of bitcoin jumping nearly 10% in one month.
Heading into Q4, the Genesis loan portfolio was about 60% BTC and 40% alt-coins, with XRP constituting nearly 50% of altcoins, according to the report. Prior to Q4, 98% of bitcoin on loan was used exclusively for hedged use cases such as arbitrage, basis capture, and remittance.
Genesis is in the unusual position of being run by parent company Digital Currency Group, which has invested in more than 125 cryptocurrency startups globally, and is run by Barry Silbert, founder of SecondMarket, which was acquired by Nasdaq in 2015 to help startups sell their shares before they go public.
As a result of having direct access to this pipeline of venture-backed, and importantly, venture-vetted crypto startups, Moro’s other company, SEC registered Genesis Global Trading, unofficially started lending crypto as far back as 2014 to what he calls the company’s “friends and family” clients. “We didn’t think about too much of it at the time,” he says.
But by the end of 2017, at the peak of a crypto-frenzy that saw the overall cryptocurrency market reach $800 billion, Moro joined a fleet of other companies looking to profit even in a down market, and spun-off the trading company’s lending operations into a stand-alone entity.
As a result of this rising interest, Genesis is far from the only company in the space. Hedge fund manager Michael Novogratz’ company, Galaxy Digital last year invested $52.5 million in crypto lending startup, BlockFi. Other competitors include crypto startup Aave, which raised $16.5 million in an initial coin offering (ICO) in part to power its EthLend lending product, and early entrant Salt Lending, that was founded as far back as 2016.
Facing this rising tide of competitors, Genesis is looking to even further diversify its revenue streams. Moro says that while 75% of the $153 million he has in the portfolio is denominated in bitcoin, 13%, or about $20 million, is for lenders who don’t want to sell their bitcoin at today’s low rate of $3,381, compared to an all-time high of $19,000 in 2017, but want to generate a bit of revenue by using it as collateral for cold hard cash.
“We wanted to see if there was a demand for that, and there was,” he says.