• As investors seek higher returns, crypto financing is increasing. In just four years, it transformed this company from a small startup to a $1 billion unicorn

  • As investors seek high returns, cryptocurrency lending is becoming huge business. Amber Group has been a major winner, having grown to a $1 billion valuation in only four years. It trades cryptocurrency but makes the majority of its money by lending more than it borrows.

    The recent drop in cryptocurrency prices has prompted investors to look for high-yielding investments elsewhere in the digital universe. Several of them are entering the fast-growing field of crypto lending, which may provide investors with returns significantly greater than the meager 0.05% or so offered by banks on deposits. Crypto’savings’ accounts are available to retail investors, with yearly returns ranging from 5% to 12%. Braver, braver individuals can earn thousands of percent by lending to decentralized financing initiatives in the wilder corners of the market.

    Amber Group, a Hong Kong-based startup that raised $1 billion in a June financing round after only four years in business, is one of the beneficiaries of the crypto loan boom. Amber provides high-frequency and algorithmic trading, as well as derivatives and other specialized services. Yet, like many other crypto lenders, its primary business concept is straightforward. It borrows crypto from’savers’ who want to lend it, and then lends it to institutions or individuals who want to borrow it, such as hedge funds shorting bitcoin.

    Its products offer returns ranging from 3% to 40% or more. It focuses on Asia and primarily serves institutions, but it is increasing its retail consumer base. ‘What we’re doing is practically the same as a bank,’ Amber’s CEO Michal Wu told Insider earlier this week. ‘Of course, we do take a little interest margin on it ourselves.’ Amber’s interest margin contributes for 70% to 80% of revenues, which may be approximately $500 million in 2021.

    Crypto exchange Coinbase and hedge fund Tiger Global Management have both invested in the company, which has around $1.5 billion under management. Coinbase is getting into the lending game as well. The largest US crypto exchange announced the opening of a crypto savings account with 4% yearly interest at the end of June. Gemini, Bitfinex, and BlockFi are just a few of the many companies that offer comparable services.

    What’s the catch, then? If the return is significantly larger than that of a traditional savings account, it must be a substantially riskier investment. The lack of federal deposit insurance in these savings products is the biggest risk for ordinary investors. Investors are turning over management of their cryptocurrency to relatively new corporations that may run away with it or go out of business.

    ‘If the lender’s assets get degraded somehow through a sell-off, where liquidated collateral doesn’t support loans given, or during a hack lose funds,’ according to David Grider of research firm Fundstrat.

    Users may lose a significant chunk of their investment owing to poor business management.’ Coinbase has attempted to assuage investors’ fears by reassuring them that it does not lend to unapproved third parties. Amber Group, according to Wu, only lends to institutions on an over-collateralized basis, which means borrowers must put up more of one asset than they are borrowing.

    Crypto finance’s promise of consistent profits, according to Wu, is attracting a big number of new investors, including retail traders, the ultra-rich, and even traditionally conservative family investment offices. Wu, like many other financially minded crypto enthusiasts, believes that greater regulation is a good thing. ‘Let’s be honest, there are a lot of nasty guys in this field,’ he continues. ‘It’s really better for regulators to get engaged earlier… the [businesses] who can innovate while simultaneously being compliant and dealing with global regulation will win.’

    What's your reaction?