As per an article by Bloomberg, another credit bubble is growing – the crypto loans market. However, the bubble may burst soon owing to the lack of robust lending standards and high risk. While this seems to be the case with the lending economy created by centralised crypto companies, the rise of smart-contract based lending protocols in the DeFi economy may help turn around the state of affairs in the crypto loans market.
The Bloating Crypto Loans Bubble
The crypto loans market, just 2 years old, is now worth a whopping $5 billion. The market sprung after the ICO bubble burst in 2018 and the price of digital assets came crashing down. People who did not want to sell their crypto holdings at low prices. That is when the idea of lending crypto to earn interest or use as collateral to borrow cash emerged, and it quickly burgeoned into a market worth billions of dollars.
While this market has opened new opportunities for credit, it doesn’t come without its own share of problems. A group of former Wall Street traders believe that this market has grown too quickly and it is heading towards a blow-up. The market is characterized by relaxed lending standards and high risk, and these two major issues are a cause of concern for many stakeholders of the crypto market.
Alex Mashinsky, the founder of lending platform Celsius Network feels that institutions with strong compliance and risk management procedures do not pose a risk to this market. Instead, the risk comes from unsophisticated individual traders holding highly leveraged crypto derivatives.
However, it is to be noted that even institutions are not infallible,