Crypto Lending Can Survive The Bear Market.

According to one Bitcoin expert, bear markets are far more cruel for crypto lending firms than for cryptocurrency enterprises that do not leverage consumers’ deposits.

According to some industry analysts, the continuing bear market in cryptocurrency markets is too damaging for industry lenders, but the notion of crypto financing can still survive the carnage.

Cryptocurrency lending is a sort of cryptocurrency service that allows borrowers to use their crypto assets as collateral to obtain loans in fiat currencies such as the US dollar or stablecoins such as Tether (USDT). Users can obtain funds without having to sell their coins and repay the loan at a later date.

Crypto enterprises that operate on a fractional-reserve basis, according to Josef Ttek, Bitcoin (BTC) analyst at the crypto cold wallet firm Trezor, face more risks during bear markets.

The fractional-reserve model in traditional banking is a system in which only a portion of deposits are guaranteed by actual currency. According to Ttek, crypto lending organizations are “definitely running a fractional-reserve business” to provide yields to their customers.

The executive stated:

“Exchanges and custodians that run on a fractional-reserve model are playing with fire. This practice may work fine during bull markets when such companies experience net inflows and grow their customer base,”

Sharp drops in cryptocurrency values, according to Ttek, are more manageable for crypto businesses that do not provide loan services and do not leverage consumers’ deposits. This permits them to withstand the domino effect of dropping pricing and company failures.

“If you throw in leverage — trading with borrowed funds — the losses are often much more painful, especially with sudden price moves,” Tětek noted.

To survive the continuing crypto loan crisis, cryptocurrency lenders must address a major issue involving short-term assets and short-term liabilities, according to the analyst, who stated:

“Crypto lending as a concept can survive this crisis, but the sector needs to get rid of the maturity mismatch problem: if someone else borrowed my assets and I get a yield as a return, then I have to wait for the borrower to repay before I can withdraw.”

Ttek went on to warn that lenders who offer 100% liquidity on assets that are lent out at the same time are bound to run into liquidity problems.

Every member must recognize the dangers involved, as well as the reality that there are no bailouts in the sector, so if a borrower fails to repay, a lender must take their loss.  There is no risk-free yield, and the yield is frequently insufficient to compensate for the dangers, he noted.

The crypto lending business is experiencing one of its most severe crises in history, with cryptocurrency prices falling to 2020 levels and the overall market cap plummeting by more than $1 trillion since the beginning of the year.

Celsius, a prominent worldwide crypto lending platform, halted all withdrawals on June 13, claiming “extreme market conditions” after its native CEL coin dropped over half its value. Babel Finance, a Hong Kong-based asset management and crypto lender, also briefly halted redemptions and withdrawals from its products on June 17 owing to “exceptional liquidity pressures.”

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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