More Liquidation Coming Ahead of Crypto Market Recovery: Cumberland

Crypto trading firm Cumberland has weighed in on the current trend of centralized digital asset firms collapsing amid a deep liquidity crunch that is clouding the sector. This suggests that the immediate recovery of the overall market depends in part on the ability of troubled assets to be transferred from insolvent to solvent companies.

The crisis is not over yet

When a prolonged bear market hits the crypto industry, overleveraged companies tend to be in deep trouble as their collateral plunges in value, quickly leading to liquidation. As a result, a ripple effect is spreading through the industry, knocking down one company after another. When users are all rushing to withdraw funds, which increases the liquidity problem, some companies may have to take extreme measures like suspending withdrawals and transactions.

Given the backdrop of a series of companies already halting withdrawals, downsizing and seeking restructuring, Cumberland argued that the deteriorated market situation is in a state of uncertainty, as the most struggling companies could soon collapse due to the colossal size of their liabilities. The worst-run companies must have their assets liquidated to “partially offset their outstanding debts”, according to the report.

As more and more crypto assets are liquidated, prices will continue to fall, which means more pain for the industry. cumberland seen the current crisis is quite similar to what happened in traditional markets since “the underlying economics are no different from textbook examples”.

Additionally, the company believes that the recovery of the hard-hit crypto market hinges on how well these insolvent companies handle their “distressed assets.”

For example, FTX sent a $250 million revolving line of credit to BlockFi a few weeks ago to fund its operations and repay existing loans. Later, the exchange giant increased the amount to $400 million, with the privilege of acquiring the failing loan company at a discount of $240 million in the future.

DeFi versus CeFi

When investors are hesitant to inject capital into the crypto space, as seen in the drop in off-chain inflows, volatility tends to increase as asset liquidity decreases. Unlike CeFi, which involves complicated human-controlled processes for deploying capital, DeFi has demonstrated relative strength in transparency regarding liquidation levels as well as its distance from the spot market, Cumberland noted.

Known for their algorithmic mechanism that forcefully executes smart contracts despite market conditions, DeFi protocols would automatically liquidate collateral whenever thresholds are hit. This partly explains why they outperformed centralized companies offering similar off-chain services during the massive market crash.

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