What determines interest rates for bitcoin lending?

Shuai Zhang, Xinyu Hou and Shusong Ba

Research in International Business and Finance, 2021, vol. 58, issue C

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.

Keywords: Bitcoin lending; Interest rate; Loan-to-value ratio; Moderated mediation model (search for similar items in EconPapers)
JEL-codes: C5 E43 G21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:58:y:2021:i:c:s0275531921000647

DOI: 10.1016/j.ribaf.2021.101443

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