Stablecoins Play Large Role in Institutional Bitcoin Borrowing and Lending, Study Finds

According to a recent study by decentralized borrowing/lending platform Lendingblock, the overwhelming majority of institutions involved in the digital asset space prefer to lend/borrow in stablecoins.

  • Some 68 percent of polled institutions said that they preferred to use stablecoins to limit their exposure to volatility.
  • The study polled digital asset market makers, custodians, hedge funds, trading houses, and exchanges.
  • Firms borrow digital funds to cover working capital needs.
  • Borrowing demand exceeds lending supply.

Canvas bag with the label Loan.

Borrowing Demand Very Strong, Bigger than Lending Supply

Lendingblock’s researchers also found that borrowing demand and lending supply have registered healthy growth in the period extending from January to April 2019. The former well outpaced the latter, though. The development made perfect sense against the backdrop of the “crypto spring”.

More than 50 percent of the institutions polled stated that their borrowing needs exceeded their lending demand. Some 82 percent of companies expected to take out at least one digital asset loan at any given time. Of these, 30 percent said they would go for at least five loans.

Number of loans institutions are willing to take at onceOneFewer than 5More than 5
19%51%30%

For digital asset investors, this means that there are healthy returns on the lender side. Those already involved in lending have made it clear that they liked the direction of the borrowing/lending markets.

Forty-one percent said they were ready to lend out five loans at any given time. Fifty percent limited themselves to fewer than five loans, with just nine percent sticking strictly to one loan at a time.

Number of loans institutions are willing to lend out at onceOneFewer than 5More than 5
9%50%41%

Lenders overwhelmingly look to hand out loans at least 30 days long. Borrowers seemingly take whatever they can get, regardless of the borrowing term.

New Borrowing Trends Point to the Maturation of Digital Assets

More interesting still are the purposes for which institutions are likely to borrow digital assets.

Purpose of borrowingMarket MakingShort-sellingHedgingWorking CapitalArbitrage
4%14%21%29%32%

Apparently, firms nowadays primarily borrow digital assets to cover their working capital needs. Companies do not just bet on short-term drops in asset value. They rely on digital currency for their day-to-day operations.

The significance of this shift from mere gambling to covering actual business needs cannot be overlooked.

Stablecoins Rule Borrowing/Lending Markets

Lending markets have taken to USD-backed stablecoins like fish to water. Some 68 percent of companies involved in the space use stablecoins and there is a growing appetite for more.

Such virtual currencies entail minimal risks associated with volatility. Institutions use them both as principal and collateral in loans.

Stablecoins – a Necessary Evil, or Just Necessary?

[Stablecoins] are the first step before you actually see anything else interesting happening.” 

– MakerDAO founder, Rune Christensen

Bitcoin purists have reservations about the philosophical underpinnings of stablecoins. Such coins are mostly centralized and pegged to hated fiat currency, and bitcoin purists feel that fiat is destined for demise.

There is a problem with that view though. Flawed as they are, stablecoins are still the only anchor to stability for the virtual currency industry. As such, they fulfill an essential role.

Only when digital currencies are spent and lent/borrowed the way fiat currencies are today can the world detach itself from the current financial system. Stablecoins are a necessary stepping stone for the creation of such an ecosystem.

According to advocates, however, their potential may even exceed that of bitcoin. While that remains to be seen, it seems clear that stablecoins represent a conduit to mass adoption of cryptocurrencies, at least in the short term.

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