The cryptocurrency has been going through a lot of bearish trends in the past few months. A recent report by JP Morgan highlighted that the crypto hedge fund Three Arrows Capital (3AC)’s recent meltdown signifies that the impact of the crypto market plunge is not going away sooner.
The bank opines that while it is tough to estimate how much more deleveraging is going to happen, its indicators assert that the process is well advanced already.
And that the various failures within the entities in the industry should not startle the folks given the backdrop of deleveraging and the slump of 70% in digital asset market capitalization after last November.
Furthermore, the bank highlighted that the entities that employed high leverage earlier are the most vulnerable ones now. Whether it is miners having borrowed to expand operations utilizing their Bitcoin (BTC) as collateral, or corporate like MicroStrategy having borrowed in the past to invest massively into the crowned crypto asset, or its hedge funds using futures to lever their positions, or retail investors borrowing through margin accounts to invest in several digital assets.
The report also highlights that the 3AC’s collapse is a manifestation of this deleveraging process; it added that the process seems advanced, making the base formation process in crypto markets more volatile.
The bank said that Bitcoin (BTC) miners is other source of stress for the crypto industry, given the pressure to sell their tokens to deleverage or to compensate for the operations’ cost. And that the Bitcoin (BTC) selling by the miners grew last month and might continue into this quarter as well,
And that the weak crypto entities with high leverage and low capital levels are the most challenged. At the same time, the ones with the healthiest balance sheets are more likely to survive and would evolve stronger once the crypto winter is over.
The banking giant discovers two reasons to suggest that the cycle might not be quite protracted. Stronger crypto firms with highly robust balance sheets are moving in to facilitate contain contagion and the constant healthy pace of venture capital (VC) funding, which is an essential source of capital for the cryptocurrency ecosystem.
Source: https://www.thecoinrepublic.com/2022/07/01/is-this-crypto-space-deleveraging-cycle-not-really-extensive-jp-morgan-thinks-so/