As a researcher with years of experience in the tumultuous world of cryptocurrencies, I can’t help but feel a mix of intrigue and trepidation whenever I see high-risk loans spiking to levels not seen since the crypto winter of 2022. The dance between opportunity and danger that these loans represent is as captivating as it is precarious.
The increase in high-risk crypto loans is happening once more, and experts’ observations suggest that this growth should not be viewed as a favorable development within the digital currency sector.
According to data from IntoTheBlock’s market analytics platform, the amount of high-risk loans has climbed up to around $5 million, a figure not seen since the collapse of numerous crypto lending companies in May and June of last year.
High-risk Loans Spike to May 2022 Level
High-risk loans are frequently employed to capitalize on price differences (arbitrage) within the cryptocurrency market. These activities encompass strategies such as buying cryptocurrencies at lower prices in one exchange and immediately selling them for a profit at higher prices in another, all within a single transaction. Although these loans can lead to quick gains, they are typically associated with risks due to the volatile nature of cryptocurrencies.
A significant challenge with high-risk loans lies in the potential for lenders to lose the pledged security if the market value of the assets drops below the point where they can be sold to recover the loan amount.
According to IntoTheBlock, high-risk loans are ones that are nearly 5% from being liquidated, meaning the value of the assets pledged as collateral is almost equal to their selling prices. Experts argue that the expansion of such high-risk loans should be closely watched in crypto lending systems, as they could potentially lead to market liquidity problems.
Potential Market Liquidity Issues
As I delve into my research, I’ve come across an interesting observation by IntoTheBlock: steep market drops can result in the collateral used to secure loans becoming inadequate, leading to bad debts and losses for lenders. Massive liquidations due to insufficient collateral can spark a spiraling decline in cryptocurrency prices, further endangering loans and exacerbating the downward trend.
Furthermore, by implementing a chain reaction of liquidations, crypto lending platforms may avoid injecting fresh liquidity into the market to minimize potential losses.
Previously, when high-risk loans reached levels similar to the present, around a dozen crypto companies, primarily lending platforms such as Celsius Network, Voyager Digital, Three Arrows Capital, BlockFi, and Babel Finance, experienced financial collapse and became bankrupt.
Multiple explosive events might be explained by various reasons, such as the unpredictability of cryptocurrencies, which led to the uncoupling (or depegging) of the stablecoin terraUST and its related token, LUNA, due to their inherent volatility.
The failure of the TerraLUNA system set off a chain reaction, leading to a large-scale forced repayment of loans because the security for these loans was inadequate. As IntoTheBlock pointed out, this massive repayment exacerbated liquidity problems, contributing significantly to the ongoing crypto market downturn.
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2024-10-17 07:16