Crypto-lending can still survive the bear market, says analyst

The ongoing bear market in the cryptocurrency markets is too damaging for industry lenders, but the concept of crypto loans may still survive the carnage, according to some industry experts.

Cryptocurrency lending is a type of cryptocurrency service that allows borrowers to use their cryptocurrencies as collateral to obtain loans in fiat currencies such as US dollars or stack coins such as Tether (USDT). The practice allows users to get money without having to sell their coins and repay the loan at a later date.

According to Josef Tětek, Bitcoin (BTC) analyst at the crypto-cold wallet company Trezor, crypto companies that run their business on a fractional reserve basis are exposed to greater risk in bear markets.

In traditional banking, the fractional reserve model is a system in which only a fraction of deposits are supported by actual cash. Crypto-lending companies “definitely run a sub-reserve business” to provide returns to their customers, according to Tětek.

“Stock exchanges and managers who run on a fractional reserve model are playing with fire. This practice can work well during bull markets when such companies experience net inflows and increase the customer base, “said the manager.

According to Tětek, sharp falls in cryptocurrency prices are more bearable for crypto companies that do not offer lending services and do not take advantage of users’ deposits. This allows them to survive the domino effect of falling prices and falling companies.

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

In order to survive the ongoing cryptocurrency lending crisis, cryptocurrency lenders need to solve a major problem related to short-term assets and short-term liabilities, the analyst claimed, stating:

“Crypto loans as a concept can survive this crisis, but the sector must get rid of the maturity mismatch problem: If someone else borrowed my assets and I get a return as a return, I have to wait for the borrower to pay back before I can withdraw.”

Tětek went on to say that liquidity problems are inevitable for lenders who promise full liquidity on assets that are lent at the same time.

“Each participant must respect the risk involved and the fact that there are no rescue packages in the room, so if a borrower is unable to repay, a lender must accept the loss. There is no risk-free return, and often the return is not worth the risk,” he said. he to.

Related: Celsius’ recovery plan proposed in the middle of the community-led short-term trial

The crypto-lending industry has faced one of its biggest historical crises while cryptocurrency prices have fallen to 2020 levels, with the total market value 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 original CEL token lost about 50% of its value. Hong Kong-based asset manager and cryptocurrency lender Babel Finance also temporarily suspended redemptions and withdrawals from its products on June 17 due to “unusual liquidity pressures.”