Institutional investors find incentives not to borrow. This situation affects the earning potential of retail users.
Currently, lending bitcoins and other digital assets to some platforms to create interest with them is not as advantageous as it was some months ago. This variation has connections with specific market conditions, mainly related to institutional investors, which force these spaces to readjust their users’ incomes.
The institutional demand for loans is decaying, and that forces the platforms to minimize the interest they give to their users. This situation means that the most prominent actors, companies, in this case, do not find the right conditions to invest by borrowing funds from the customers of these spaces.
Consequently, they do not get profits from lending funds to institutional investors, which forces them to set a reduction on interest for users who lend their cryptocurrencies.
According to The Block portal, the interest given by centralized networks such as BlockFi, Celsius, and Ledn has approached their minimum in more than a year. For example, in the case of BlockFi, the annual interest for holders of more than one bitcoin (BTC) went from 6.25% to 1-3% up to 0.35 BTC, plus 0.1% for more principal amounts.
The other two networks executed similar cuts. Additionally, interest rates for stablecoin deposits have also crumbled down by about one percentage point.
According to the quoted source, this situation takes effect after two years of the significant increase in this type of service, which already gathers millions of clients. As of March 2021, these three entities managed USD 12 billion and 20 billion.
Interest Rates Crumble Down
The cryptocurrency market has closed for many days with crashes. This bear market could be driving the decadence in demand for borrowed funds from huge investors.
On this point, a report highlighted by the Len lending platform in early May details that bitcoin futures contracts got currently priced lower than the current market value of the digital asset. This situation reduces the possibility of making profits by acquiring a bitcoin at one price ($30,000, for example) and then trading a future at a higher price.
Due to this low profit, big investors do not find much use in borrowing funds to invest in this type of investment. On the other hand, Ledn highlighted a lower volume of arbitration between exchanges, which in turn minimizes the demand for market makers or market creators.
The role of market makers is to borrow crypto assets to take control over price differences between exchanges. That is, purchasing on one exchange at one price and selling it on another where the digital asset trades at a higher value.
However, Ledn explains that the return generated by acquiring $1 million worth of bitcoin on exchanges Coinbase and FTX has fallen 50% in the last three months, from 0.16% to 0.08%.
By: Jenson Nuñez
