Bitcoin Arbitrage Is Driving Demand for Cash, Crypto Lender Says

(Bloomberg) -- Cash was king among hedge funds and miners looking to take advantage of arbitrage opportunities and add leverage during the fourth-quarter downturn in cryptocurrency prices.

Genesis Capital said cash and equivalent loans as a percentage of outstanding loans increased significantly for a third consecutive quarter in the three months ended Dec. 31. The loans represented 37.2% of the New York-based lender’s active loan portfolio at the end of last quarter, up from 31.2% in the third quarter and 14% a year earlier. Loans in Bitcoin dropped to 47% of the portfolio, from 63% at the end of June, around when the largest cryptocurrency’s price peaked for the year.

For much of last year, near-dated Bitcoin futures contracts traded at a premium to the spot price on a bullish bet that prices will rise over time. If the premium becomes large enough, traders will borrow cash to buy the underlying spot and sell the future, capturing the premium. Investors such as hedge funds, miners and family offices also looked to add to their exposure with leverage, according to Genesis Capital, which lends out funds on cryptocurrency as collateral.

“We are trading at 50% of the Bitcoin all-time high right now, so people are still saying that they are weary,” Genesis Capital Chief Executive Officer Michael Moro said in a phone interview. “But I guarantee the narrative changes dramatically when the price is back up.”

Genesis started providing cash loans as a test in the third quarter of 2018, and the offering quickly picked up steam as Bitcoin’s downward spiral of 2018 reversed.

Business exploded over the past year, with $3.1 billion in issued loans -- about a third of that amount in the fourth quarter alone, the company said. Genesis launched its lending business in March 2018, and issued $1.2 billion in loans that year. The company serves institutional investors such as funds and market makers, and offers loans ranging from two weeks to six months.

Bitcoin’s price rose by about 95% in 2019, and it’s up 30% this year, to back above $9,000. Many traders are anticipating that the coin’s price will rise as Bitcoin undergoes so-called halvening in May, when its effective rate of inflation will diminish.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Randall Jensen

©2020 Bloomberg L.P.