More liquidations await before the market recovers

According to Cumberland, the speed of the crypto market's recovery will depend on "the speed with which assets are transferred from troubled to safer companies."

The cryptocurrency trading firm weighed in on the ongoing trend of centralized digital asset firms breaking up amid a deepening liquidity crisis, noting that assets owned by these distressed companies will have to be liquidated. Assets will have to be sold to settle unpaid liabilities.

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The crisis continues, recovery will occur only after further declines

When a prolonged bear market hits the cryptocurrency sector, over-leveraged firms tend to struggle as their collateral declines in value, soon leading to liquidation. As a result, a domino effect spreads across the industry, bringing down one firm after another.

When all users rush to withdraw funds, which increases the liquidity problem, some firms have to take extreme measures, such as suspending withdrawals and transactions. Rada companies are already closing downloading, reduces Number of employees and works on restructuring.

This situation puts the market in a state of uncertainty as more troubled companies may soon collapse due to their colossal size of liabilities. More mismanaged firms need to liquidate their assets to “partially settle their outstanding liabilities. According to to Cumberland, this dynamic has a big impact on cryptocurrency prices:

"Uncertainty hangs over the market about the amount and timing of these asset sales."

The company, with more than 25 years of experience working in the financial markets, further highlighted that after 3AC and Celsius, a number of companies in the cryptocurrency industry are under severe pressure.

"The market is full of companies going bankrupt. So until the market clears, nothing will pick up.” In other words, any market recovery depends on this clear. It is this liquidation and insolvency scenario that reduces liquidity and increases market volatility.

The company also mentioned that DeFi outperformed centralized firms during the massive market crash thanks to an algorithmically driven mechanism that automatically liquidates collateral whenever it hits thresholds.

“Unlike CeFi, which involves complicated human-driven processes for allocating capital, DeFi has demonstrated relative strength in terms of transparency around liquidation levels.”

Similar concerns

QCP Capital, a cryptocurrency trading company in Singapore, shared similar concerns. According to the company, the crisis in the cryptocurrency sector is not over yet and more potential liquidations are on the horizon. As an example, she stated that the details of Babel Finance's insolvency have not yet come to light.

The company emphasized that "miners make up a large part of Babel's clientele" and any revelation that it is in default would cause further selling pressure in the market.

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All content in this article is for informational purposes only and does not in any way serve as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.