The Scoop: Crypto credit goes conservative

This column was co-written by Frank Chaparro, director of special projects at The Block, and Laura Vidiella of MNNC Group. The views expressed in this column are their own and do not reflect the opinions of their employers. 

One of the cornerstones of our careers over the years has been trading market gossip and insights with each other and other market participants. So, while the Genesis meltdown was a disaster for a ton of reasons, one unfortunate side effect was the loss of their quarterly report — a goldmine of data on derivatives, credit and OTC trading.

For those unfamiliar, the Genesis report was like an earnings call on steroids, offering deep dives into key trades, derivative volumes, spot activity and more. Now, without that quarterly beacon, the crypto credit market feels a bit murkier — no single giant to serve up trends on a silver platter.

So now we’ve got to roll up our sleeves to get a read on the crypto credit scene. Fortunately, Frank spent the week rubbing elbows at the Wyoming Blockchain Symposium in Jackson Hole, courtesy of SALT. After chatting with executives from Kraken, Galaxy and other major players, we picked up some insights into the current state of crypto credit. Long story short, the days of unsecured lending in institutional crypto trading are long gone, and firms are still approaching the expansion of their footprint in credit gingerly and with caution. There’s zero indication that any firm offering lending to their institutional clients will be shouting eye-popping quarter-over-quarter growth from the rooftops any time soon — certainly not like Genesis in 2022. 

“There was a hole in the market,” noted Galaxy’s Steve Kurz in an interview with Frank on-site in Jackson Hole. “We have always been more conservative, and we weren’t willing to [take] the same risk as others.” 

Indeed, Genesis left a massive gap in the credit market after going bankrupt with a lending book that had swelled to nearly $20 billion at the market's peak. However, Galaxy’s loan book is slowly — yet intentionally — building out, growing by 5% between Q1 and Q2 of 2024 to reach $699 million. Kurz pointed out that when operating across derivatives and lending, your business starts to resemble a bank, bringing with it the responsibility to meet higher standards and manage risk carefully.

Kraken is following a similar path. In an interview with The Block, CEO Dave Ripley emphasized that while their lending business is steadily growing, “we haven’t done anything on an unsecured basis.” "Conservative" is the current mantra in the crypto credit space.

Coincidentally, Frank’s Jackson Hole trip and the SALT conference overlap with Federal Reserve Chair Jerome Powell's visit to the Cowboy State. Bitcoin BTC +5.46% tiptoed its way to a modest gain earlier Friday as the market collectively held its breath. 

This week, the crypto world wasn't just fretting over interest rates, though. Fears of a looming BTC dump from the long-defunct Mt. Gox exchange added to the unease, casting a shadow over what was otherwise a rather quiet one. With markets adopting a risk-off stance and a sudden yen surge throwing another wrench into the mix, bitcoin's path seemed as uncertain as ever.

Despite briefly flirting with the $60,000 mark the majority of the week, bitcoin's weekly performance remained lackluster overall. The specter of Mt. Gox lingered as wallets associated with the exchange moved an additional $700 million worth of bitcoin, raising alarms about a potential flood of bitcoin hitting the market. Meanwhile, broader financial markets were in a similar state of limbo, with Wall Street indexes closing lower on Thursday. As traders eyed the Jackson Hole Symposium, opinions were split on just how much the Fed might slice off interest rates in September — whether it'll be a 25 or 50 basis point trim, as well as cut or cuts in the plural, remains the question of the hour.

After the Jackson Hole Symposium, bitcoin decided to put on a show, briefly skyrocketing past $62,000 after Jerome Powell's dovish hints at future interest rate cuts . But just as quickly as it soared, the excitement fizzled, and bitcoin settled back down to around $60,800. Analysts are now in "wait-and-see" mode, hoping bitcoin can hold steady above $61,000. The market is keeping its cool, carefully watching for any signs that this rollercoaster ride might be gearing up for another round, especially as the Back to School season kicks in and everyone returns to their desks after Labor Day weekend.

With funding rates at their lowest since March 2023 and rising open interest hinting at more short positions, the stage may be set for a potential short squeeze.