Cumberland contends that additional poorly managed assets must be sold off before a fundamental market turn can be observed.
The industry-wide trend of centralized digital asset organizations disintegrating amid a worsening liquidity problem was discussed by cryptocurrency trading firm Cumberland. It implies that whether the distressed assets might be shifted from bankrupt enterprises to solvent ones is a factor in whether the entire market would see an immediate recovery.
Crisis is not yet over
Overleveraged businesses often find themselves in serious problems when a protracted bear market strikes the cryptocurrency sector since their collateral’s value plummets, quickly forcing them into liquidation. As a result, a domino effect occurs throughout the sector, bringing down one company after another. Some businesses may need to take drastic measures, such blocking withdrawals and transactions, when users all rush to withdraw money at once, exacerbating the liquidity problem.
Cumberland argued that given the context of a number of businesses already stopping withdrawals, cutting headcount, and considering restructuring, the market’s deteriorating condition is in a state of uncertainty as more troubled businesses may soon go under due to their enormous sizes of liabilities. The research stated that more poorly managed companies needed their assets liquidated to “partially offset their outstanding liabilities.”
Prices will keep falling as more crypto assets are liquidated, causing additional harm to the industry. Since “the underlying economics are no different than the examples in textbooks,” Cumberland believed that the current crisis was extremely comparable to what had occurred in the traditional markets.
Additionally, the company thinks that how those bankrupt companies handle their “distressed assets” will determine whether or not the severely battered crypto market recovers.
For instance, FTX recently granted BlockFi a $250M revolving credit line to help it with operations funding and loan repayment. Later, the exchange behemoth raised the sum to $400M with the option of later purchasing the insolvent loan company at a $240M discount.
DeFi versus CeFi
The decline in off-chain inflows is evidence that investors are reluctant to invest in the cryptocurrency market, and volatility is likely to rise as asset liquidity falls. DeFi, on the other hand, has shown to be rather strong in terms of openness about liquidation levels as well as its separation from the spot market, according to Cumberland. CeFi, in contrast, requires complex human-controlled processes for capital deployment.
DeFi protocols would automatically liquidate collaterals if the thresholds are touched. They are well known for their algorithmic-driven mechanism that forces smart contracts to execute regardless of market conditions. It partially explains why, during the severe market meltdown, they outperformed centralized companies that provide comparable off-chain services.
