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What determines interest rates for bitcoin lending?

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  • Zhang, Shuai
  • Hou, Xinyu
  • Ba, Shusong

Abstract

This study analyses the determinants of interest rates in the cryptocurrency lending market using a unique database from the Decentralised Finance platform. We confirm the existence of both mediation and moderation effects in the cryptocurrency lending market by employing a moderated mediation model. First, the empirical results show that the interest rate is closely related to the loan-to-value ratio, which works as the mediation variable in lending. Second, the interest rate reveals a clear connection with price fluctuations of Bitcoin. This brings up the momentum phenomenon in the lending process and incentives borrowers to acquire more money, leading to pro-cyclical speculation. Third, the lending amount reflects a moderation effect in the lending market, and the net effect of the currency price on the interest rate turns negative when the loan amount exceeds a threshold, resulting in the ‘seesaw’ effect in cryptocurrency lending. The above findings confirm that cryptocurrency lending reflects a certain degree of option characteristics and complies with the risk-debt model, which provides more evidence for understanding the momentum phenomenon and investor behaviour in the cryptocurrency lending market.

Suggested Citation

  • Zhang, Shuai & Hou, Xinyu & Ba, Shusong, 2021. "What determines interest rates for bitcoin lending?," Research in International Business and Finance, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:riibaf:v:58:y:2021:i:c:s0275531921000647
    DOI: 10.1016/j.ribaf.2021.101443
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    More about this item

    Keywords

    Bitcoin lending; Interest rate; Loan-to-value ratio; Moderated mediation model;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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