On Binance’s New Crypto Lending By Michael Creadon
I was asked to comment for a media report on some of the inherent dangers in crypto lending. Here is the gist of what I had to say.
"We think the risks of a crypto credit lending event are significant. Everyone is chasing yield but they don't realize that the higher yield translates into a weaker credit counter-party. I don't think there is any question we will see a Refco/MF Global/Lehman moment within the space, it's only a matter of when.
Ironically, it could happen on a sharp rally when market participants are caught short and can't cover, and then there are forced liquidations. We prefer a crypto lending model that is predicated on options so the only risks are bilateral - not systemic.
All this will change even further, of course, when CME and ICE list cleared bitcoin options, as seems very likely. In short, credit risks in crypto lending are substantial, inevitable and perhaps imminent, and a whole lot of people are likely to get hurt because they don't fully understand the risks they are embracing."
The Binance offer, in my opinion, is a marketing ploy to bring traders onto their platform.
There's nothing wrong with that, of course, but it isn't scalable - as witnessed by the caps they impose & small coin amounts available to borrow
...Originally Posted By Michael Creadon on LinkedIn
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CZ is a visionary and a marketing genius. Of course they have a cap, it's pilot program. I agree and questioned the sustainability of this, but if enough people start trading on margin and with additional revenue streams, it's possible their lending program has legs..but they may have to lower the interests rate and need help in the token going to the Moon.
He is definitely a marketing genius. Just seeing the moves he's making in the space makes you realize that he's playing chess while most other exchanges are playing checkers. I think trading stocks on margin is quite risky, especially for the average investor. Trading crypto on margin is completely insane, imo. Crypto carries enough volatility as is, no need to add debt to make it even worse.
In his periscope the other day on Twitter, CZ announced that at first Binance will be the ones providing the coins for lending. This will soon be expanded to other parties being able to put up coins as collateral for lending. However, they will have to figure out a way to reduce counterparty risk in such a scenario. What would then be the difference between Binance Lending and some kind of low-quality P2P lending scheme? That's where Binance will seek to invest resources in order to avoid this comparison.