The cryptocurrency market is witnessing a significant increase in high-risk loans, which may lead to a rise in liquidation risks.

Increase in High-Risk Loans

According to IntoTheBlock, the total amount of high-risk loans in the cryptocurrency sector reached 55 million dollars on Wednesday. This is the highest level recorded since June 2022. High-risk loans are defined as those where the loan amount is 5% away from the liquidation price. This means that if the value of the assets given as collateral falls by 5%, the loan will be liquidated.

The Rising Risk of Liquidation Waves

Cryptocurrency investors lock their assets as collateral to take loans from decentralized lending protocols. If the value of the collateral falls below a certain level, the protocol liquidates the debt and puts the collateral up for sale. If the price of the collateral drops by another 5%, the debt starts to become under-collateralized, triggering liquidation and ensuring debt repayment through the sale of the collateral.

Market Liquidations and Bad Debts

IntoTheBlock warned that large liquidations can impact collateral values, putting more loans at liquidation risk. The analysis firm emphasized that sudden drops in market values may render the collateral insufficient to cover the loans, resulting in losses for lenders. This situation can lead to an increase in bad debts, negatively affecting market liquidity.

The rise of high-risk loans in the cryptocurrency market and the potential risk of liquidation indicate that investors and lenders need to act more cautiously.