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Report: More Liquidations Still Before Cryptocurrency Prices Recover

Report: More Liquidations Still Before Cryptocurrency Prices Recover

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Answer Report: More Liquidations Still Before Cryptocurrency Prices Recover

Cumberland has published a report examining the continuing trend of centralized crypto companies collapsing amid a deep liquidity crisis roiling the industry.

The report notes that the immediate market recovery depends in part on whether distressed assets can be transferred from insolvent firms to well-off firms.

The Crypto Market Crisis Isn’t Over Yet

When a long-term bear market hits the cryptocurrency industry, over-leveraged companies get into deep trouble as their collateral drops in value, almost leading them to liquidation.

As a result, a multiplier effect spreads throughout the industry, bringing down one company after another.

Users then all rush to withdraw funds, escalating the liquidity problem, and some companies may have to take extreme measures such as suspending withdrawals and transactions.

Read:Terra Founder Officially Suggests Splitting From The Original Project (Hard Forking) To Reboot!

Given the context of a string of companies that have already put out drawdowns, layoffs, and searches for restructuring, Cumberland argues that the deteriorating market situation is in a state of uncertainty as more distressed companies may soon collapse due to the sheer volume of their liabilities.

The report said that poorly managed companies need to liquidate their assets to partially compensate for their outstanding obligations.

As more crypto assets monetize, prices will continue to fall, which will mean more pain in the industry.

Cumberland views the current crisis as quite similar to what happened in traditional markets previously.

In addition, the company believes that the recovery of the slumped cryptocurrency market depends on how those insolvent companies manage their distressed assets.

DeFi vs CeFi:

When investors are reluctant to inject capital into the cryptocurrency space, as evidenced by declining inflows, volatility tends to increase as liquidity decreases.

Read:“Time” magazine announces the start of accepting the digital currency “ApeCoin”

Cumberland noted that unlike CeFi, which entails complex human-controlled processes to deploy capital, DeFi has demonstrated relative strength when it comes to transparency in terms of liquidation levels as well as its distance from the spot market.

DeFi protocols are known for their algorithm-based mechanism that aggressively executes smart contracts despite market conditions, and will automatically liquidate collateral whenever thresholds are touched.

Which partly explains why they outperform centralized companies that provide similar off-grid services during economic meltdowns.

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