Silvergate Capital gained nearly 50 new digital currency customers in the fourth quarter of 2019, when its traditional banking services were generally flat. While traditional lending struggles with slow growth due to maturity as well as low interest rates, niche lending activity is seeing tremendous momentum, albeit on a much lower overall volume.
Here are ten signs that the business is strong and could grow rapidly over the next few years.
- JP Morgan said its lending business rose 2% to just under $1 trillion last quarter. That’s not bad: but Genesis, a trading company that lends money alongside cryptocurrencies, grew 21% over the same period. Genesis is based in New York, but much of the lending action comes from Asia and Europe.
- Competition is minimal in the world of cryptocurrency lending compared to traditional banking. Traditional banks are reluctant to compete in this lending industry due to risk management and strict regulation. Many banks have calculated that the potential liability is too high, even though traditional risk assessment measures might argue that it is worth it.
- Borrowers are in high numbers compared to outlets that will allow loans in the form of bitcoin or “stablecoins”. Genesis loans totaled over $500 million.
- Borrowers are willing to pay a premium of up to 8%, even with strong credit histories, and are willing to pledge their personal net worth behind the loans.
- The industry is even rapidly moving towards credit cards. BlockFi plans to launch a credit card with bitcoin rewards in 2020.
- Institutional investors are also increasingly comfortable taking out loans through cryptocurrency.
- While the revenue numbers pale in comparison to traditional banks, lending spreads and growth promise not to slow down over the next 3-5 years.
- It helps that Bitcoin nearly doubled in value in 2019. With January’s growth, the currency is up over 120% over a 13-month period.
- Potential new demand for loans could come from mining companies as well as developing countries. Both sources of borrowers promise to grow as fast as cryptocurrency itself.
- As traditional banks with asset servicing continue to use blockchain technology, it will become increasingly common to hold a certain percentage of large pools of cryptocurrency assets.