We trust you are off to a great start of 2024 on the back of the long-anticipated Bitcoin ETF approval. Furthermore, with inflation in the US and Europe showing signs of easing and the prospect of lower interest rates on the horizon, the macroeconomic environment appears increasingly favourable for risk assets causing us to remain enthusiastic about the industry’s advancements and believe the recent and upcoming developments will open up more opportunities for both lenders and borrowers of digital assets.
Please reach out if you want to learn more, the team will be more than happy to talk about what we can do to suit your needs.
Looking Ahead
In our previous update towards the end of last year we already gave a sneak preview into our renewed focus towards financing selected prime brokerage (PB) borrowers driven by our belief that lending to PBs in the crypto space can offer the most competitive risk-adjusted returns to capital allocators.
Since then we have made good progress and are onboarding the first (crypto) prime broker with the aim to present this opportunity soon after completing this process alongside an extensive article where we discuss the various considerations that underpin our conviction towards this lending ecosystem and the benefits it presents to all stakeholders involved.
Market Pulse Commentary: Digital Asset Lending Landscape
As we’ve entered the new year, January started off with a high uptick in market volatility, largely fueled by anticipation of the Bitcoin spot ETF approval. This pivotal event led to a phase of large market movements, characterised by a focus on the inflows and outflows associated with the newly issued ETFs. During the month, we continued to observe a growing demand in the digital assets lending space. As we transition into February, we notice that the market is starting to consolidate after the ETF approval event and is gradually setting the stage for a potential resurgence in momentum.
Expectations from Lenders:
Our current insights into lender rate expectations reveal a noticeable increase in anticipated returns across the board. This uptrend is primarily driven by a surge in demand from trading firms. While we are observing a resurgence of undercollateralized deals in the market, the predominant trend strongly favours the overcollateralized spectrum in the institutional lending market. This trend is influenced by wholesale lenders, as highlighted in our last market pulse, and by crypto-native trading firms interested in BTC and ETH trading capital, who are willing to post 1:1 collateral for these structures.
It's important to note that, based on our analysis and market insights, we believe the market for unsecured deals remains very narrow, with only a few large top-tier counterparties possessing the necessary profile, information disclosure standards and capacity to engage in such transactions. Reflecting on these market conditions, we advocate a transition towards a prime brokerage lending model. This approach, distinct from the credit-based approach employed in the last cycle, is more effective for financing trading firms within the crypto market. We believe this model strikes an optimal balance, offering capital efficiencies akin to under-collateralized lending while technically maintaining over-collateralization due to the prime broker's control over assets within the controlled ecosystem.
From our recent market analysis, in the undercollateralized segment, lender rate expectations are falling within specific ranges:
USDC(T): 15%+ with collateralization levels ranging from 0% to 25%
BTC: 6%+ with collateralization levels between 0% and 25%
ETH: Staking rate +6% spread, with collateralization levels from 0% to 25%
Expectations from Top-Tier Borrowers:
We continue to observe a noticeable uptick in bids from top-tier, market-neutral trading borrowers, in response to the market events described above. Some quotes for unsecured loans are moving above 15% for stables, and for BTC, they are rising above 6%. Additionally, in order to meet the increasing demand from Trading Firms, the trend of Prime Brokers seeking more capital continues, with the aim of fortifying their balance sheets.
Meet the team: Victor van Eijk
Introducing Victor van Eijk: Managing Director at M11 Credit.
Victor heads-up the team and can draw from almost 20 years experience in capital markets and institutional sales and trading in both Amsterdam and New York. He has been in managerial roles at Kempen & Co, KBC Securities and NIBC.
Initially a healthy sceptic, it was a MIT Blockchain Course that opened his eyes to the disruptive impact this new technology could have on existing financial infrastructure and products and he is committed to bringing opportunities in areas such as decentralized finance to institutional investors around the globe.
Victor holds a Master's degree in Business Administration from Erasmus University Rotterdam and is an avid sports enthusiast with an Ironman triathlon and <3hr marathon under his belt.
