Bored Ape Worth Nearly $55M, CryptoPunk’s NFTs Risk Liquidation Amid Debt Crisis
Many owners of valuable Bored Ape Yacht Club (BAYC) and CryptoPunk’s nonfungible tokens (NFT), who used them as collateral to take out loans in Ether (ETH), have failed to repay their debts. The situation could lead to the NFT sector’s first massive liquidation event.
g.m.
As a result of the floor falling to 72, the first BAYC liquidation auction on BendDAO has begun
Starting price of 68.4e…
Anyone catching on or is this going to be the first bad debt domino to fall for the platform? pic.twitter.com/7qxsIi661e
— Cirrus (@CirrusNFT) 18 August 2022
BAYC “death spiral” incoming?
DoubleQ, the founder of Web3 launchpad Double Studio, says lending service BendDAO may liquidate up to $55 million worth of NFTs to recoup the loans, fearing that the so-called “health factor” of these debts could fall below 1.
In particular, an NFT collection’s floor price is important in determining the health factor. BendDAO offers 30-40% of NFT’s floor price as a loan. But the protocol sells NFT if the floor price falls too close to the amount borrowed – a liquidation threshold, as explained below.
Meanwhile, the floor price of BAYC has fallen from 153.7 ETH in May to 69.69 ETH in August – a drop of almost 55% in three months. At the same time, the health factor of at least 20 loans with BAYC as collateral has fallen to 1.1 as of 19 August, data on BendDAO shows.
4/ Why is this a problem?
There are currently 20 BAYCs with a health factor below 1.1
And much more under 1.2
It means that all these monkeys will be liquidated soon. pic.twitter.com/5jwoZZXHRT
— doubleQ (@xDoubleQ) 19 August 2022
Borrowers have 48 hours to repay the loan or their NFT collateral will be liquidated. According to doubleQ, these liquidations could lead to “a death spiral for the BAYC ecosystem and the NFT market as a whole,” given BendDAO’s exposure to other NFT projects, including CryptoPunks and Doodles.
“OpenSea volume is at its lowest point ever in the last 12 months,” the analyst warned, adding:
“There is simply not enough volume to save these liquidations… It is inevitable.”
OpenSea is the leading NFT marketplace in terms of volume.
To buy the dip or not?
Nevertheless, doubleQ believes that the incoming BAYC liquidation may offer an opportunity to buy the NFTs at cheaper prices.
7/ So what can you do to take advantage (or at least protect yourself) from the situation?
Two options:
– Offer for a loan and go for a flip
– Waiting for the mass liquidation to have one of the best entry points ever— doubleQ (@xDoubleQ) 19 August 2022
On the other hand, Naimish Sanghvi, CEO of India-based crypto news outlet Coin Crunch, wonders if there would be any buyers due to a lack of arbitrage opportunities.
“Your bid has to be more than 95% of the floor value and higher than the debt amount,” Sanghvi explained, noting that there was no room to make money on arbitrage between these values.
“The auctions don’t start until the first bid is placed, so there could be several NFTs in limbo at any given time if prices are unfavorable. And that should scare liquidity providers.”
This scenario would have BendDAO waiting for borrowers to repay their loans – or waiting for liquidators to re-emerge after a market recovery – to reduce its “temporary floating loss.”
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