As a whole, the crypto industry has undergone severe scrutiny over the past eight months. Increased interest in the industry can be traced primarily to the collapse of several big-name platforms operating in the space.
The collapse of those platforms has negatively affected the image of the global crypto industry. It has also raised questions over the suitability of crypto-based products and services in the long term.
As a critical part of the industry, the crypto-lending sector has also faced severe scrutiny from investors and regulators alike. Many firms operating in this space faltered despite showing promising potential at the start of the year. In this article, we will consider the performance of the crypto lending industry during 2022.
Our article will focus on the performance of centralized lending platforms during 2022. Additionally, we will consider factors that led to the underperformance of the crypto lending industry during the year. We will also discuss the benefits of crypto staking as an alternative to crypto lending as a form of investment.
How Did The Crypto Lending Industry Fare In 2022
As a subset of the crypto industry, the development and growth of the lending sector largely depend on the performance of the crypto markets. Thus, it is unsurprising that several crypto lending firms struggled during 2022.
The Terra Luna and FTX crypto exchange crash were two significant events that affected the crypto industry in 2022. Both events played a significant role in the crash of cryptocurrencies, with the price of Bitcoin dropping by over 65% during 2022.
Since both events ushered in and reinforced the bearish cycle for the crypto markets, they have been described as "crypto winters." In addition to ushering the bearish cycle, both events contributed directly to the collapse of several lending platforms.
Apart from these events, other factors contributed to the demise of some centralized crypto lending platforms. In many cases, operators behind those platforms made reckless decisions and mismanaged the funds of their investors. There were also times when some platforms were the victims of unfavorable laws from financial regulators.
Although, reckless management decisions and unfavorable laws from regulators greatly affected the lending space. Yet, the crash of the Terra Luna ecosystem and the FTX crypto exchange hastened the fall of several centralized lenders. We will consider the collapse of both platforms and see how it directly affected the crypto lending industry in 2022.
The crash of Terra Luna
The collapse of the Terra Luna project led to a direct loss of over $40 billion. These funds belong to investors who were part of the Terra ecosystem. At the time of the crash, the crypto markets initially showed signs of resurgence.
However, with the reality of the crash hitting investors, market sentiment quickly changed to bearish with the collapse of Celsius and Three Arrows Capital. Reports indicate that the crash of these platforms had a more damaging effect on the crypto markets over the collapse of FTX.
The instant result was a significant drop in the value of cryptocurrencies. The situation led to a market scramble as investors began withdrawing their funds. That was terrible news for crypto lenders.
By the second week of June, many top-rated crypto lenders began moving funds in their possession to avoid liquidations on overleveraged positions. However, their actions had little effect. Bearish pressure increased, causing the value of several crypto assets to drop significantly.
Terra Luna's crash showed a significant flaw with the lending model most crypto firms operating in the space adopted. In his interview with ace crypto news platform Cointelegraph, crypto economist Ryan Shea identified this flaw.
He states:
Asset price reversals are particularly challenging to crypto lenders because their business model is very much like that of a regular bank; namely, it is based on liquidity transformation and leverage, which makes them vulnerable to bank runs.
In simpler words, crypto lenders operate like traditional banks. Thus they offer interest to investors for deposits made on their platforms. These lenders offer loans to individuals and institutional investors under certain conditions to generate revenue for themselves and their investors.
However, due to the volatile nature of cryptocurrencies, lending conditions will become unsustainable when the value of the crypto asset used for issuing the loan drops drastically.
Thus, these platforms may be unable to continue their operations if the value of deposits in their possession or collateral drops below a specific value. Additionally, lenders cannot continue operations once there are multiple withdrawal requests from investors in a bank-run situation. It also does not help when borrowers default on their loans.
When you combine all of these factors simultaneously, it spells disaster for the crypto lenders. The situation described above is the main reason behind the crash of several crypto lenders this year.
Voyager And Celsius Network File For Bankruptcy
Voyager and Celsius Network were the first crypto lenders to file for bankruptcy in 2022. On July 6, Voyager filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.
Voyager collapsed after it failed to recover a crypto loan worth over $650 million for defaulting borrower Three Arrows Capital (3AC). Voyager was on track to move beyond is bankruptcy by agreeing to sell itself to FTX. However, the deal broke down with the collapse of FTX (More on this later).
Celsius Network officially filed for bankruptcy on July 13. Before its crash, Celsius had faced regulatory scrutiny for its crypto-interest offering accounts. As a result of the downtrend caused by the Terra Luna crash, the lender stopped processing withdrawals on June 12. The goal of its action was to remain solvent. However, any attempts to keep its service online proved to be ineffective.
The crash of FTX
The crash of the FTX crypto exchange also played a part in the crash of many other lending platforms. At the time, FTX tried to merge with the Binance crypto exchange. However, those attempts failed, and FTX filed for bankruptcy on Nov 11.
In terms of its scope, the collapse of FTX had a more significant effect on the crypto markets. Currently, the exchange owes $3.1 billion to its 50 most senior unsecured creditors. FTX's crash helped to reinforce the continuity of the bear market. Thus creating conditions that were unfavorable to crypto lending platforms.
Contagion Spreads To BlockFi
In the aftermath of FTX's bankruptcy, BlockFi was the first lender to declare bankruptcy. The lender filed for bankruptcy two weeks after FTX's collapse. Regarding their working relationship, BlockFi relied on a $400 million credit facility from FTX to continue its operations.
However, with the crash of the crypto exchange, BlockFi went under. Voyager was also affected by FTX's crash. Although Voyager had previously declared bankruptcy, it had agreed to sell its assets to FTX. The deal was estimated to be worth over $1.2 billion.
Currently, Voyager has reopened bidding for the sale of its assets. When the platform is acquired, the lender may be restructured so investors can continue to access lending opportunities.
Mismanagement & Reckless Decision-Making
Hostile market conditions played a crucial part in the underperformance of the crypto lending industry during the year. However, mismanagement and reckless decision-making contributed significantly to the fall of several platforms.
A closer look at the day-to-day operations of many lenders showed a need for more planning to overcome hostile market conditions. Such planning was not in place before the beginning of the bear market. A lender that was particularly guilty of mismanagement and reckless decision-making was Celsius Network.
In the case of the Celsius Network, the lender had consistently carried out questionable business practices. Celsius's faults included claiming to be fully insured when it was not.
Additionally, some platform officials had questionable backgrounds, with the company's CFO previously arrested for fraud. Bitcoin influencer Dan Held lists many other problems in a twitter thread released on June 17.
Crypto Staking As An Alternative To Crypto Lending
In place of crypto lending, investors who plan to remain in the crypto industry can try out staking as an alternative investment opportunity. Although staking offers lower interest rates than lending, this investment tool is most suitable for present market conditions.
Crypto staking is mainly affiliated with blockchain networks that run a proof-of-stake consensus mechanism. However, investors can deposit their assets and earn rewards from staking pools. Additionally, several centralized exchanges offer crypto staking as an investment option.
As a subset of the crypto industry, staking crypto entails several risks. However, regarding its performance, staking has proven to be a much safer option than crypto lending.
In a news report released on Nov 1 by Staking Rewards on Twitter, the market cap of the crypto staking industry was worth over $93.5B. That valuation indicates that investors see crypto staking as a viable investment option despite current market conditions.
Thus, it is unsurprising that several crypto exchanges are opening up opportunities for investors to stake and earn on their platforms. These platforms are also developing new services built on staking cryptocurrencies. At the same time, other staking providers are expanding their staking product offerings.
For example, crypto exchange BitMEX launched an Ethereum Staking Yield Swap on Dec 8. The ETH Yield Swap is a first of its kind in the crypto markets. Also, Tranchess, the liquid staking provider for the BNB ecosystem, increased its product offerings by launching a non-custodial liquid staking product. The product is also known as qETH.
Continuous innovation in the crypto staking space points to stability amid the chaos of current market conditions. Innovation and growth will no doubt reassure investors that their assets are safe.
Conclusion
The crypto lending industry has undergone drastic changes during 2022. Initially, the industry showed promising potential. However, the industry has significantly faltered due to unfortunate events. There is still hope that the industry can thrive again.
However, conscious and deliberate efforts must be made to ensure its revival. Such steps would include better regulatory processes to help protect investor funds. Also, the management teams operating these lending platforms need to make intelligent decisions in the day-to-day running of their firms. Such executives must actively plan to protect their investors regardless of unfavorable market conditions.
In the meantime, crypto staking has become a more viable alternative to crypto lending. Visit the Bitcompare website to learn more about the Best Crypto Staking Platforms of December 2022.
