The decentralized lending sector has hit a new high, with “high-risk” crypto loans rising to $55 million, the highest in over two years. This growth raises concerns about potential market volatility and liquidity issues.
Analysts warn that increased liquidations could adversely affect prices, leading to bad debts and lenders losing money.
The Risk of Liquidation Cascades
Recent data shows that loans within 5% of their liquidation price are at the highest level since 2022, raising fears of market disruptions.
A key indicator to watch in lending protocols is high-risk loans. Here’s why this matters????
High-risk loans are loans within 5% of liquidation. Spikes in high-risk loans can contribute to cascading liquidations…
Crypto loans become high-risk as they approach liquidation thresholds. If collateral value drops by just 5%, it can lead to forced liquidations, resulting in a downward spiral that further hurts the market.
Impact on Market Liquidity and Lenders
Bad debts may freeze market liquidity. They complicate repayment terms and reduce traders’ ability to execute large transactions, heightening risks and limiting available capital.
Macro Outlook as High-Risk Crypto Loans Surge
The surge in high-risk crypto loans indicates growing market unease. As liquidations approach, market sentiment shifts to fear, leading to preemptive selling and further volatility.
Conservative strategies among traders can lead to mass sell-offs, reducing liquidity and exacerbating market instability.
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