Analytics proclaims that Crypto lending can still survive a bear market
According to a Bitcoin analyst, the beer market is much more brutal for crypto lenders than for cryptocurrency firms that do not accept user deposits.
The bear market running in the cryptocurrency market is very detrimental to industry leaders, but according to some industry experts, the idea of crypto debt can still survive the bloodshed.
Cryptocurrency lending is a type of crypto service that allows borrowers to use their crypto assets as collateral to obtain loans in fiat currency such as US dollars or stablecoins such as Tether (USDT). The practice allows users to accept money without selling their coins and without repaying the loan at a later date.
According to Josef Tětek, Bitcoin analyst at the crypto cold wallet firm Trezor, crypto firms that operate on a fractional-reserve basis are more likely to be exposed to bear market risk.
In traditional banking, the fractional-reserve model is a system where only a fraction of the deposit is supported by actual cash. According to Tětek , Crypto lending companies are “definitely running a fractional-reserve business” to provide yields to their customers.
The executive added, “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”.
According to Tětek, the sharp fall in cryptocurrency prices is more tolerable for crypto businesses that do not provide credit services and do not offer users deposit benefits. This allows them to survive the falling price and the domino effect of going down the company.
He added, “If you throw in leverage — trading with borrowed funds — the losses are often much more painful, especially with sudden price moves”.
To endure the ongoing crypto lending crisis, cryptocurrency lenders need to solve a major problem related to short-term assets and short-term liabilities, the analyst argued, stating:
“Crypto lending as a concept can survive this crisis, but the sector needs to eliminate 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.”
Tětek also says that liquidity issues are inevitable for lenders that promise full liquidity on assets that are lent out simultaneously.
He added, “Every participant needs to respect the risks involved and the fact that there are no bailouts in the space, so if a borrower fails to repay, a lender has to accept their loss. There is no risk-free yield, and often the yield is not worth the risks”.
The cryptocurrency industry is facing one of its biggest historical crises since cryptocurrency prices plummeted to 2020 levels, with total market caps shrinking by more than $ 1 trillion since the beginning of the year.
Celsius, a major global crypto lending platform, suspended all withdrawals on its platform on June 13, citing “extreme market conditions” as its native CEL token lost about 50% of its value. Babel Finance, a Hong Kong-based asset manager and crypto lender, also temporarily suspended withdrawals and withdrawals from its products on June 17 due to “unusual liquidity pressures”.
