Crypto’s rapid growth is showing no signs of slowing. As traditional assets fall flat in terms of yield, institutional and retail investors are moving towards crypto, with the market value rising above USD 2 trillion in mid-August.
On the back of the skyrocketing investor interest, Matrixport’s Head of Sales and Business Development, Cynthia Wu recently participated in a webinar alongside Leon Marshall, Head of Institutional Sales at Genesis, Jason Urban, Co-Head at Galaxy Digital Trading, and Bill Barhydt, Founder & CEO at Abra. Entitled “Yield Generation: North America vs. Asia”, the discussion explored yield generation opportunities in crypto, with a focus on the potential of DeFi. Here is a recap of some key takeaways.
Extracting Yield from the Crypto Market
While there are various ways to generate returns such as options strategies, the golden opportunity lies in the lending market for crypto.
First emerging in 2019, the lending market typically provides prime services such as collateralized loan, credit loan, or margin lending. As more investors and institutions seek liquidity to trade, the loans segment began to gradually develop a mature, bank-like structure.
Nowadays, institutions provide liquidity to each other, and with the forward curve, there is constant lending and borrowing in the market that generates incredible yield in the process. This summer, Matrixport alone has seen significant altcoin borrowing requests from institutional players being channeled to DeFi, illustrating the lending market’s potential to drive yield and keep the market active even during bearish periods.
Permissionless Arena to Transfer Risks
Yet, it is important to understand that the yield generation activities in crypto, such as investing into a protocol, borrowing and selling, entails transferring and managing risks. With Crypto’s innate characteristics of being a permissionless arena, the yield generation process presents incredible opportunities but also potential pitfalls, both becoming larger by the day through increased investor demand.
For instance, investing in DeFi comes with different types of risks, including protocol risks such as bugs, hacks, and frauds; speculative risks of making the right bet on the underlying assets; and counterparty risks around guarantees of your loans being repaid. T
herefore, the need to develop sophisticated and elaborate methods to generate yield in a complex DeFi landscape has never been more critical.
That is why professional asset management services in the field are devising ways to mitigate the risks that frequently arise from interacting with DeFi protocols. Matrixport’s Centralised-DeFi offering does just that by pre-assessing potential vulnerabilities in the smart contracts or other aspects of a DeFi project before ever deploying investments on behalf of investors. Ultimately, the expertise of such asset management services function as a safety net for investor protection, an essential step to build confidence around DeFi and crypto for the would-be investors.
The Moment of Adoption by Old Money
The sophistication of yield generation business in crypto raises the final question: “When would be the point where old money, i.e. deposit heavy institutions like credit unions or traditional banks, use their cash and earn yield from crypto?”
With the yield that is offered from the likes of a money market fund, it is undeniable that there will be a phase where everyone will want to hold appreciating crypto assets and borrow in the depreciating assets, such as dollars and euros.
However, the banks do not perceive the issue in a similar way until there is regulatory clarity. While the space has been significantly de-risked from five to seven years ago, there are still no clear lines on how crypto markets will be regulated, making it difficult for large traditional institutions to responsibly allocate assets without jeopardising their position.
The risk of an overhang of regulatory action may be the final big boss for our industry to reach its peak. The ongoing efforts that industry players are making to mature and professionalize the field and de-risk it through innovation will play a huge role in streamlining the endeavor for regulatory clarity, thereby enabling those on the margins with big money to find their way to crypto.