According to one Bitcoin analyst, bear markets are significantly more harsh for crypto lenders than cryptocurrency firms that don’t rely on deposits from users.
Lending in cryptocurrencies is a crypto service that allows borrowers to use their crypto assets as collateral to receive loans in fiat currencies like the US dollar or stablecoins like Tether (USDT). Users may utilize this technology to acquire cash without having to sell their coins and pay back the loan at a later date.
According to Josef Tětek, Bitcoin (BTC) analyst at Trezor, crypto businesses that operate on a fractional-reserve basis are more susceptible to risks during bear markets.
In a regular bank, the fractional-reserve system is one where only a fraction of deposits are backed by real currency. According to Tětek, crypto lending firms “certainly” operate a fractional-reserve business in order to provide returns to their clients.
“Exchanges and custodians that utilize a fractional-reserve model are playing with explosives. During bull markets, when such firms gain new customers and experience net inflows, this method may function well.
Tětek says that cryptocurrency price drops are more tolerable for firms that do not provide loans and do not use customer deposits. This allows them to withstand the chain reaction caused by plummeting prices, as well as the failure of other businesses.
Cryptocurrency lenders must address a major problem with short-term assets and short-term liabilities in order to survive the ongoing crypto lending crisis, according to the expert. He added, “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.”
Tětek added that liquidity difficulties are unavoidable for lenders that guarantee complete liquidity on assets lent out at the same time.
The crypto lending market has been experiencing one of its most significant historical problems in the wake of a cryptocurrency prices collapse to 2020 levels, with the overall market cap declining by more than $1 trillion since January.
On June 13, a major global crypto lending platform, Celsius suspended all withdrawals on its platform due to “excessive market conditions.” Babel Finance, a Hong Kong-based asset manager and cryptocurrency lender, temporarily halted redemptions and withdrawals from its products on June 17 due to “unusual liquidity pressures.”
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