Do you know what is common among the celebrities — Gwyneth Paltrow, Ashton Kutcher, Kanye West, Mike Tyson or Bill Gates?
They have invested in cryptos, and many have launched their own token/projects they genuinely believe in. Why would a celebrity opt for a modern investment plan when the traditional age-old concept proves to be right?
As your relationship manager might have advised you umpteenth times — Don’t put all your eggs in one basket! Its kind of the same strategy followed by celebrities and even institutions that have triggered the trend of including crypto investment strategies in the institutional market.
Our post of today would focus on one of the strategies — crypto lending or institutional borrowing in the crypto world, the strategy offered and how big brands are helping in supporting the system.
Institutional Borrowing Strategies
Business borrowing is like a lifeguard; borrowed money needs to be used strategically to reduce costs and increase revenue. If you are mishandling your debt it can fall into a downward spiral leading to the downfall of finances and ultimately businesses. Hence understanding the product is the first step to business borrowing.
What type of flavors exists for an institution in the crypto lending ecosystem?
Act as Market Makers on crypto Exchange
Many Lending platforms offer a loan for fixed durations that can be used by institutions for market-making in creating an active market for buyers and sellers by placing multiple limit orders in an order book of an exchange.
The loan is usually a low-interest loan that needs to be paid back in full after the duration of the contract. Many lending platforms offer USD as collateral for lending. The institutions could use the token issued to make the market. However, once the lease expires the borrower needs to return the tokens loaned.
BTC-USDC Market screenshot indicates characteristic of a healthy market, with a tight spread, i.e. 1 cent wide for BTC that is valued at $8319.27.
What’s in for Institutions or Businesses?
As a market maker, you are providing liquidity, ensuring order trading, and bridging the gap of buyer & seller. Hence you can earn rewards taking short term risks and keeping an eye on both directions of scores. To boost your returns, one should target high volume products like the top 10 coins. Tokens with less liquidity may not provide returns you are aiming for.
You can commit to offer a constant bid-ask spread for a predetermined quote size and duration. And also commit on order book depth, i.e. the amount of an asset that could be used to purchase at a given price level.
Use Borrowing for Speculation and Hedging
Firms and institutions who are looking for working capital can opt for loans with collaterals as their balance sheets. In the bear market, it happens offer as Genesis capital reported in their Q3 quarterly report –
As we can see, lending volume in Q3 is driven by speculation/hedging.
The crypto-backed loans are using the advantage of speculation by gaining additional exposure to a digital asset with leverage, taking benefits of an arbitrage trade, or shorting a digital asset that you believe may be overvalued.
What’s in for Institutions or Businesses?
The crypto-collateralized institutional borrowers are not willing to sell the cryptos but are fine in turning as hodlers experimenting ways to invest and get positive returns with the funds they have parked into crypto.
This speculative financial use case could play a significant role in driving more institutions towards crypto-backed loans.
How is the ecosystem Fuelling Institutional Borrowing and investment?
While many are still understanding the game plan, many early adopters are armed to support institutional investment strategies.
One of the early supporters of the group is Forbes, who early this year launched a premium subscription digital newsletter called Forbes CryptoAsset & Blockchain. Its an initiative geared towards educating potential investors, assist in understanding the use case wit a goal to provide profitable and actionable advice.
Another leading investment bank, in Feb 2019, launched its cryptocurrency JPM Coin that can be used only by institutional clients. JPM’s focus on the digital token is currently on cross-border payments to corporate debt issuance.