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The total value of high-risk loans, defined as those within 5% of their liquidation threshold, has surged to $55 million. This marks the highest level since June 2022, according to data from analytics firm IntoTheBlock.
The sharp increase highlights a growing concern in the crypto lending market, where traders often borrow against collateralized digital assets.
On decentralized lending platforms, loans are secured by collateral. Moreover, if the value of that collateral drops too much, the platform automatically sells it to repay the debt.
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What Are High-Risk Loans?
A loan is considered high-risk when the collateral’s value is within 5% of the liquidation price, meaning a small drop in asset value could trigger the loan’s liquidation.
This rise in risky loans is significant as it raises the possibility of a liquidation cascade—a scenario where multiple liquidations occur in quick succession, driving down asset prices and causing further liquidations.
Such a cascade can lead to heightened market volatility. “Large liquidations can reduce the value of collateral, putting more loans at risk of liquidation and creating a downward price spiral,” IntoTheBlock warned in a market update.
They emphasized that sudden drops in the market can leave collateral insufficient to cover loans, leading to bad debt and losses for lenders. The increase in bad debt can also strain market liquidity, making it harder for large trades to be executed without significant price fluctuations.
“Bad debt discourages lenders from adding new liquidity, as they aim to avoid potential losses,” the firm noted.
As the market grapples with this rise in high-risk loans, the potential for increased volatility and liquidity challenges remains a key issue for decentralized lending platforms and the broader crypto ecosystem.
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: Large liquidations can impact the collateral value, putting more… pic.twitter.com/YV1YAGwDrG
— IntoTheBlock (@intotheblock) October 16, 2024
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Crypto Adoption Reaches Record Levels
Cryptocurrency usage has soared to unprecedented levels. Furthermore, it shows no signs of slowing down, according to a report by venture capital giant Andreessen Horowitz.
The report estimates that the number of global cryptocurrency owners has hit a new high of 617 million this year. Moreover, 30 to 60 million active users have been engaging with crypto regularly.
In another report, digital asset technology platform Aspen Digital revealed that a growing number of Asia-based private wealth managers are embracing cryptocurrencies, with some predicting that Bitcoin could reach $100,000 by the end of this year.
The report said that digital assets are becoming a popular investment option among Asia’s private wealth sector, with 76% of family offices and high-net-worth individuals (HNWIs) currently invested in cryptocurrencies.
According to the report, most participants identified the potential for higher returns as the primary motivator for investing in cryptocurrencies. Diversification and the appeal of using digital assets as a hedge against inflation also emerged as important factors driving interest.
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