Fundstrat Global Advisors has issued a warning to its clients who invest in bitcoin and crypto, advising them to take risks or hedge their bets over the weekend, amid concerns over the increased effect leverage in the emerging market.
“We believe it is possible that the sell-off we saw over the past day was related to concerns about leverage and counterparty risk of some lenders,” wrote David Grider, chief strategist of digital assets at Fundstrat. Counterparty risk refers to the possibility that a trading partner will encounter problems and not be able to meet the obligations typically associated with derivative contracts.
At the last check on Saturday, bitcoin BTCUSD,
was trading down more than 4%, changing hands at $ 31,481.62, but at a low, below $ 30,000, for the world’s No.1 crypto set up earlier in the week.
Fundstrat, an independent research store, co-founded by prominent bitcoin bull Tom Lee, highlighted a tweet Thursday from crypto mogul Barry Silbert, which cautioned against counterparty risk and leverage in crypto which could potentially translate into further turmoil in digital asset markets.
Silbert warned that there is a “daisy chain of borrowers and lenders in the crypto space … and warned that it is” important to understand counterparty risk “and where the weak links in the chain lie. .
Silbert is considered a luminary in the digital asset world, having founded two of the most well-known companies in the crypto arena: Grayscale Investments, which operates the popular Grayscale Bitcoin Trust GBTC,
and the Digital Currency Group, which also owns CoinDesk.
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Concerns about leverage in crypto come amid the general crypto collapse that has driven down values of bitcoin, as well as Ether ETHUSD,
on the Ethereum blockchain, and assets even like DOGEUSD dogecoin,
Bitcoin is down more than 50% from its mid-April peak, Ether is down 60% from its all-time high in May and dogecoin is down almost 70% from its all-time high reached early last month.
Certainly, the appeal of these assets is their oversized cumulative returns, with dogecoin showing a gain of over 5,000% so far in 2021, Ether rising over 140% in the first six months of this year.
But those gains were drastically reduced, with bitcoin rising a relatively modest 9% over the year, compared to the traditional benchmarks of the Dow Jones Industrial Average DJIA,
the S&P 500 SPX index,
and the Nasdaq Composite Index COMP,
all of which are up at least 11% over the year to date. Bitcoin had risen by more than 100% in the spring.
Crypto’s recent downtrend has been in part blamed on a China crackdown on bitcoin mining and trading, but analysts are also warning that the crisis could reveal poor positioning by some investors and dangerous use. leverage, or borrowed money, to amplify returns.
Fundstrat also warned of the potential volatility emanating from some popular crypto lending platforms, which promise significant returns to those who deposit digital assets.
“We want to remind customers that crypto lenders are not regulated and insured the same way banks are with the [Federal Deposit Insurance Corporation]. “The FDIC collects fees from member lenders to provide insurance to depositors in the cash-strapped financial institution.
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“Depositors have a counterparty risk to lenders and if they become insolvent they could lose their funds,” Fundstrat wrote.
“At worst, we run away from the banks, which causes asset prices to drop too much, otherwise good lenders could disappear. We don’t expect that… But we don’t think it’s a bad idea to take risks this weekend, ”Grider wrote.
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