With the recent faltering of crypto markets, we’ve seen lenders and funds throughout the world start to buckle and break under the pressure of poorly managed risk. Large, over-leveraged firms have not only been massively liquidated, but they have endangered the survival of other associated firms within their orbit. As a consequence, lending markets, one of the most successful and scaled sectors within the crypto finance sector, have new pressure. With previous sources of easy yield having dried up, it remains an open question as to where yield will be found.
Prior, firms depended on the “basis trade” (buying spot BTC and selling the future) as a source for easy yield, with annualized yields as high as 25% on this “risk-free” trade. This trade has now collapsed as futures markets are trading nearly flat or negative.
Another source was the “GBTC” trade. Back when Grayscale shares sold at a premium, one could buy the shares at spot prices, wait for the 6 month lock-up period to expire, and then sell the GBTC shares as a premium. Now that GBTC shares sells at a hefty discount, this is not only no longer possible, but has resulted in major losses for many firms.
Another “easy” source of yield was staking UST on Anchor for 18% USD yield. This did not end well.
From one lens, this is a sign of maturation, where efficient markets don’t give away free money so easily. However, with so few reliable sources of yield remaining, lenders are in a difficult position, needing to promise yields to investors to remain competitive, but with few places to look.
One source that still remains is intelligent trading on crypto derivatives markets. Unlike Defi Option Vaults, which have simplistic strategies and have been destroyed over the past few weeks of volatility, firms like Two Prime, apply dynamic trading techniques to pull safe yield out of derivatives markets. Just this month alone, Two Prime has realized in-kind profits on BTC and ETH of about 6.5% by trading volatility. Trading volatility is a well known approach within traditional markets. Crypto lenders would be wise to start looking here for yield while the opportunity remains.