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Crisis Impact on Crypto Lending Sector

Mar 27, 2020

So far economy in the world is totally unprepared for this Coronavirus crisis. The crisis brought on by the coronavirus has been a shock to the entirety of the global economy. Every industry in the world is fighting to find ways to adapt to the new way that was thrust into reality few weeks ago. One of the most affected sectors has been global financial markets.

This has also been true in the cryptocurrency industry. Everyone is aware that the crypto lending sector has gained a reputation for resilience amid market downturns. While a majority of Bitcoiners and other crypto advocates believed that cryptocurrencies would act as a safe haven during times of crisis, the opposite has proven to be true, so far.

Considering effects of crisis, every crypto industry has been affected in its own way–including the crypto lending sector. Despite of the long, slow fallout of the cryptocurrency markets, crypto lending companies are profiting. Crypto lending sector has been praised for staying profitable during some of the more beastly bear markets in recent history. While usually the rest of the industry is suffering, cryptocurrency lending companies managed to thrive through the disaster. Reason for this could be that the companies are benefitting from customers on both sides of the crypto market crash - those who are trying to hold onto their coins for the long run, and those who are betting that prices will fall.

However, the current situation and financial crisis that has plunged crypto markets into some of their lowest levels in months may have different implications than the bear markets that have previously taken over crypto. This time, the downturn in crypto is coupled with a massive downturn in markets across the board. How has the coronavirus crisis affected the crypto lending sector so far? And how will the sector be affected by the virus in the long-term?

For all of the vulnerabilities that have been revealed in the crypto lending industry as a result of the corona-induced “stress test”, just as many strong spots and weak points have also been revealed in the crypto industry more generally. There are more opportunities to obtain leverage in cryptocurrencies than any other commodity. Whatever model people were using to apply leverage to their crypto holdings was blown out in a big way, which means there’s de-leveraging, selling, and de-risking. Given the 24/7 nature of the crypto markets, and the resulting “fluidity of collateral” leverage in this space can ratchet up or down very quickly. The most impressive aspect of coronavirus spread outside of the price move is certainly the resilience of the overall digital asset backend infrastructure. Usually this time around, the market crash did cause some disruptions in industry infrastructure–but also revealed that the strength and flexibility of the infrastructure has improved.

A big crypto market correction on December 17th, 2019, caused all of the major platforms connectivity failure one after another. This time, with the exception of a few smaller platforms going offline, the entire industry demonstrates an impressive resilience against a 50% or greater swing in price. Platforms scaling to be able to handle concurrent connections and upgraded order matching engines which can handle much more capacity, furthermore, many of these exchanges are powered by Amazon Web Services (AWS) so the big winner is Amazon, which is racking up fees.

Technological solutions aren’t the only thing that must improve as the corona crisis continues to unfold, also flexibility in internal operations as well as strengthening communications across the sector is essential. Companies that are faring best in response to COVID-19 are those that have been able to mobilize quickly to effectively adapt the way they operate. Businesses that have been able to leverage an almost fully remote workforce to maintain day-to-day operations with minimal impact on the business have no doubt fared better than those that require the physical presence of employees or customers in order to conduct business.

Additionally, companies should take extra measures to ensure that their communications strategies are strong. Companies are advised to develop a clear, consistent communications strategy and have to work on to set and manage customer expectations in a timely manner. It is believed that businesses with quality customer service and have likely fared well, as they are able to help clients manage stress and work through any issues from market volatility, all while conducting their business in good standing. If handled correctly, the anxiety surrounding the coronavirus and the market volatility could present an opportunity for companies to strengthen relationships with clients, when businesses help customers when they need it most, customers could remember the experience and it builds brand loyalty over the long term. Similarly, those that have offered assurance to customers along with alternative tools and ways to take productive actions during this time to minimize frustration have fared best, given transparency and communication are essential, especially in times like these.

Although this bear market may have been born out of vastly different circumstances than other bear markets in crypto history, the volatility that the virus has caused in crypto markets means that the outcome will likely be the same. Just as in the past, “crypto-backed lenders are likely faring better than other crypto businesses during the global pandemic, as they offer a way for crypto holders to get cash without having to sell their cryptoassets. Even more, crypto lenders may be able to offer other platforms and investors the tools that they need to survive the downturn: “in the midst of a market crash, crypto-backed lenders can meet customer needs by offering additional liquidity. Crypto-backed lenders are a more appealing option for those customers who want to maintain ownership of their cryptoassets and use them as collateral for a cash loan rather than sell them.

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