The decentralized lending sector has surged, with high-risk crypto loans now totaling $55 million, the highest in over two years.
This increase raises concerns about potential liquidations and market volatility. Analysts warn this could lead to price drops, causing lenders to suffer losses.
The Risk of Liquidation Cascades
Data shows that loans within 5% of their liquidation price have reached their highest since June 2022, suggesting possible market disruption.
A key indicator in lending is high-risk loans. Here’s why it matters:
High-risk loans are those close to liquidation. Spikes can lead to:
Cascading Liquidations, impacting the collateral value. pic.twitter.com/YV1YAGwDrG
— IntoTheBlock (@intotheblock) October 16, 2024
Crypto loans become high-risk when they approach liquidation limits. In decentralized lending, when collateral value falls by just a bit (5%), the loan is at risk of liquidation.
This surge in high-risk loans may signal a market downturn. If collateral drops further, loans could be liquidated, causing a chain reaction that drives prices down.
Impact on Market Liquidity and Lenders
IntoTheBlock notes that bad debts can freeze market liquidity, making it hard for traders to make large transactions without unstable prices.
Lenders may hesitate to introduce new liquidity, fearing losses. This can worsen liquidity issues, creating a riskier trading environment.
Macro Outlook as High-Risk Crypto Loans Surge
The rise in high-risk loans reflects market unease. As loans near liquidation, traders react defensively, leading to price drops and increased volatility.
Currently, the fear and greed index is at 66.00 (FEAR), indicating market apprehension. This situation can lead to mass sell-offs, making conditions even tighter for the crypto market.
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