Genesis Capital's loan book continues to grow during its most volatile quarter

Genesis Capital, one of the largest institutional crypto lending businesses, released its quarterly insights report which outlined sustained growth in originations during an incredibly turbulent quarter. During this time they surpassed their quarterly all-time high with $2 billion in loans originated nearly doubling the previous high from last quarter and bringing their cumulative amount lent to $6.2 billion.

As the price of bitcoin rallied to over $10k, speculators were becoming increasingly bullish creating an abnormally steep futures curve with an implied 30% annual return on the March contracts. In times like this, arbitrageurs can borrow cash to buy spot and short the futures to earn a relatively risk-free rate of return on the spread. This lucrative basis trade created a growing amount of leverage in the derivatives market.

When the price began dropping, borrowers faced margin calls and were forced to top up their collateral to retain their position. On March, 12th, every financial asset seemed to become correlated and began plummeting. Bitcoin was not spared and saw its value cut in half. This created a vicious cycle of deleveraging as traders unwound their basis positions, creating more sell pressure on the spot price, which then led to more liquidations in the derivatives market. To further exacerbate the problem, since most derivatives contracts are collateralized in bitcoin when the amount of bitcoin needed for liquidations exceeds the amount of liquidity at that price, order books get decimated as there simply aren’t enough bids to sustain a stable market.

From the perspective of Genesis, they saw much of their cash loans returned during that time which explains why cash as a percentage of their loan book dropped for the first time since they began offering them at the start of last year. Otherwise, there wasn’t much change in the composition of loans other than a second straight quarterly increase in BCH loans which typically signals a growing short interest.

This period of extreme volatility acted as a stress test for lenders and the crypto market as a whole. It wasn’t pretty but most of the major players came out alive. Last year, Bloomberg called the $5 billion bitcoin credit market a bubble implying it’s bound to pop at the first sign of duress, but despite the near market implosion, Genesis has yet to experience any defaults or capital losses.

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