High-Risk’ Crypto Loans Hit Two-Year High of $55M

According to IntoTheBlock, a crypto analytics firm, the volume of highly risky crypto loans has reached a two-year high. These crypto-collateralized loans, currently valued at $55 million, are very near their liquidation price. It has increased jitters over the possibility of some market turbulence and liquidation cascades.

The way to take crypto loans is to lock digital assets as collateral. They will get liquidated once the value of the collateral drops a little too much. If the collateral decreases to become less than the loan amount, liquidation is touched. A high-risk loan usually has collateral that is within 5% of its liquidation price. It only means the loan will be liquidated with just a 5% drop in its value.

Key Points About High-Risk Loans:

The sharp rise in these high-risk loans indicates a chance of liquidation cascades. In this scenario, the protocol sells off collateral, which lowers prices and causes other liquidations. This chain reaction can cause extreme market volatility.

IntoTheBlock has warned that large-scale liquidations may lead to a downward spiral in prices. They pointed out that, if collateral values drop fast, lenders may suffer from bad debt. Bad debt happens when there isn’t enough collateral to cover the loans. This reduces liquidity, making it hard to trade without triggering further price drops.

Bad debt also discourages lenders from providing new liquidity. Without enough liquidity, the market could struggle to stay stable, which might lead to further price declines. Lenders may be hesitant to take on more risk, increasing uncertainty in the market.

With $55 million worth of high-risk loans currently in play, the decentralized lending market faces potential instability. If crypto prices continue to fall, these loans may trigger a series of liquidations, creating more volatility for the entire market.

This rise in risky loans shows just how delicate the market can be, especially when prices fluctuate rapidly. Crypto traders and lenders should be cautious in this volatile environment to avoid major losses.