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High-Risk’ Crypto Loans Hit Two-Year High of $55M

According to IntoTheBlock, a crypto analytics firm, the volume of highly risky crypto loans has reached a two-year high. These crypto-collateralized loans, currently valued at $55 million, are very near their liquidation price. It has increased jitters over the possibility of some market turbulence and liquidation cascades.

The way to take crypto loans is to lock digital assets as collateral. They will get liquidated once the value of the collateral drops a little too much. If the collateral decreases to become less than the loan amount, liquidation is touched. A high-risk loan usually has collateral that is within 5% of its liquidation price. It only means the loan will be liquidated with just a 5% drop in its value.

Crypto loans nearing liquidation levels, increasing risk of market instability.
Source: https://www.hodlnaut.com/academy/crypto-lending-introduction-basics

Key Points About High-Risk Loans:

 

Loan Status

Collateral Value Change

Risk Level

Safe

Value steady or rising

Low

High-Risk

Collateral drops by 5%

Very High

Liquidated

Collateral drops over 5%

Loan is sold

The sharp rise in these high-risk loans indicates a chance of liquidation cascades. In this scenario, the protocol sells off collateral, which lowers prices and causes other liquidations. This chain reaction can cause extreme market volatility.

IntoTheBlock has warned that large-scale liquidations may lead to a downward spiral in prices. They pointed out that, if collateral values drop fast, lenders may suffer from bad debt. Bad debt happens when there isn’t enough collateral to cover the loans. This reduces liquidity, making it hard to trade without triggering further price drops.

Bad debt also discourages lenders from providing new liquidity. Without enough liquidity, the market could struggle to stay stable, which might lead to further price declines. Lenders may be hesitant to take on more risk, increasing uncertainty in the market.

With $55 million worth of high-risk loans currently in play, the decentralized lending market faces potential instability. If crypto prices continue to fall, these loans may trigger a series of liquidations, creating more volatility for the entire market.

This rise in risky loans shows just how delicate the market can be, especially when prices fluctuate rapidly. Crypto traders and lenders should be cautious in this volatile environment to avoid major losses.

October 19, 2024 at 2:00 pm

Updated October 19, 2024 at 2:00 pm

Disclaimer

Remember, investing in cryptocurrencies involves risks, and it’s important to conduct thorough research and seek professional advice before making any financial decisions. (Please keep in mind that this post is solely for informative purposes and should not be construed as financial or investment advice.)

FAQ

Cryptocurrency is a digital form of currency secured by cryptography, not controlled by governments or banks.

Cryptocurrency wallets are digital tools for storing and managing your crypto assets.

Best practices for crypto investment include research, diversification, investing what you can afford to lose, and avoiding hype-driven investments.

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