Industry lenders are too worried about the ongoing bear market in cryptocurrency markets, but some experts say that crypto lending is still possible.
A type of cryptocurrency service, cryptocurrency lending allows borrowers to use crypto assets as collateral for loans in fiat currencies such as the US dollar or stablecoins such Tether (USDT). This allows users to borrow money in cryptocurrency without the need to sell any of their coins or repay the loan later.
Josef Tetek (Bitcoin (BTC), analyst at Trezor crypto cold wallet firm Trezor says that crypto firms that operate on a fractional reserve basis are more vulnerable to bear markets.
The fractional-reserve system is an alternative to traditional banking. It allows only a small percentage of deposits to be backed up by cash. According to Tetek, crypto lending companies “definitely run a fractional reserve business” in order to offer yields to customers.
“Exchanges, custodians, and custodians who operate on a fractional reserve model are playing with fire. The executive said that this practice could work well during bull markets, when companies have net inflows and can grow their customer base.
Tetek says that crypto businesses that don’t provide lending services or leverage user deposits are more able to bear sharp drops in cryptocurrency prices. They are able to withstand the fallout from falling prices and companies going bankrupt.
Tetek stated that when you add leverage (trading with borrowed funds), the losses can be much more severe, particularly with sudden price movements.
The analyst stated that cryptocurrency lenders must solve a major problem related to short-term assets or short-term liabilities in order to survive the current crypto lending crisis.
Although crypto lending can be a viable concept, it needs to be reformed to avoid the maturity mismatch problem. If someone else borrows my assets, and I receive a yield, I must wait for the borrower’s repayment before I can withdraw.
Tetek stated that lenders who promise liquidity on assets being lent out simultaneously are bound to face liquidity problems.
“Everyone involved must be aware of the risks and accept that there are no bailouts in this space. If a borrower defaults on a loan, the lender will have to take their loss. He said that there is no guaranteed yield and that sometimes the risk is too high.
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Due to cryptocurrency prices plummeting to 2020 levels and the total market cap shrinking more than $1 trillion since 2017, the crypto lending industry is facing one of its most severe historical crises.
Celsius, a global crypto lending platform, has suspended all withdrawals from its platform since June 13. This was due to “extreme market conditions”, as Celsius’ native CEL token had lost approximately 50% of its value. Babel Finance, a Hong Kong-based crypto lender and asset manager, temporarily stopped redemptions and withdrawals of its products on June 17, due to “unusual liquidity tensions.”