Cumberland, a crypto trading company, commented on the current trend of central digital asset firms failing amid a deeper liquidity crisis. This suggests that the market’s immediate recovery partly depends on whether distressed assets can be transferred from insolvent to solvent firms.
The Crisis is not over yet
Over-leveraged companies in the crypto sector are more likely to experience a bear market. Their collateral loses value quickly, leading to liquidation. The ripple effect spreads throughout the industry, eventually causing each firm to fall. Users rush to withdraw money, increasing the liquidity problem. Some firms may need to take extreme measures, such as suspending withdrawals or transactions.
Cumberland stated that in the face of several firms looking to reduce headcount and stop withdrawals, the market is in an uncertain state. More troubled companies could soon go under due to their large liabilities. The report stated that more poorly managed companies should have their assets liquidated in order to “partially offset” their outstanding liabilities.
Prices will continue to plummet as more crypto assets are liquidated. This will cause more pain for the industry. Cumberland saw the current crisis in crypto markets as similar to the ones that had occurred in traditional markets, since “the fundamental economics are not different from the examples in textbooks.”
The firm also believes that the recovery of the crypto market is dependent on how insolvent companies manage their “distressed asset”.
This is not a new phenomenon. Excessively levered finance firms have been punished in bear market for hundreds of years. Although the digital assets may raise eyebrows, the underlying economics of this current cycle are not unlike those in textbooks.
Cumberland (@CumberlandSays), July 5, 2022
FTX, for example, sent a $250M revolving line of credit to BlockFi weeks back to finance its operations and pay off existing loans. The amount was increased to $400M by the exchange giant. In addition, the company had the opportunity to acquire the failing lending firm at a discounted $240M.
DeFi vs CeFi
As investors hesitate to invest capital in crypto space, as evidenced by the decrease of off-chain Inflows, volatility tends increase when asset liquidity drops. Cumberland observed that DeFi is a better alternative to CeFi which requires complex human-controlled capital deployment processes.
DeFi protocols are known for their algorithmic-driven mechanism which executes smart contracts regardless of market conditions. They would automatically liquidate collaterals when the thresholds are reached. This partially explains why DeFi protocols have outperformed other centralized firms offering similar services off-chain in the huge market crash.
Marla Brooks – Financial Analysis
My name is Marla Brooks, and I am the mainstream behind the”observednews.com” for the powerful and most delicate insights into the latest activities in the financial analysis category. I started my journey as an independent financial consultant. I had approximately nine years of experience in this field. I am free soul so; my passion for exploring the world has taken me to the nations across the globe and given me the chance to report for a portion of the best news associations. Currently, I am a full-time editor as experienced in finance and started to use my abilities.