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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’s possible that the sell-off we saw over the past day was related to concerns about leverage and counterparty risk from some lenders, wrote David Grider, chief digital asset strategist. at Fundstrat. Counterparty risk refers to the possibility that a trading partner will encounter problems and be unable to meet the obligations generally associated with derivative contracts.
As of the last check on Saturday, bitcoin BTCUSD, -6.28% 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 introduced earlier in the week.
Fundstrat, an independent research store, co-founded by prominent bitcoin bull Tom Lee, pointed to a Thursday tweet from crypto mogul Barry Silbert, which cautioned against counterparty risk and leverage in the crypto that could potentially translate into further turmoil in digital asset markets.
Silbert warned that there is a chain of borrowers and lenders in the crypto space and cautioned that it is important to understand counterparty risk and where the weak links in the chain are.
Silbert is considered a luminary in the world of digital assets, having founded two of the most well-known companies in the crypto arena: Grayscale Investments, which manages the popular Grayscale Bitcoin Trust GBTC, -6.52%, 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 caused bitcoin, as well as Ether ETHUSD values to fall, -8.06% on the Ethereum blockchain, and assets even like the dogecoin DOGEUSD, -8.13%.
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 lies in their outsized 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, + 0.69%, the S&P 500 SPX, + 0.33% and the Nasdaq Composite Index. COMP, -0.06%, all of which are up 11% or more since the start of the year. Bitcoin had risen more than 100% in the spring.
Cryptos’ recent downtrend has been in part blamed on a Chinese 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 would like to remind customers that crypto lenders are not regulated and insured in the same way that 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 counterparty risk to lenders and if they become insolvent they could lose their funds, Fundstrat wrote.
At worst, we have a leak on the banks causing asset prices to drop too much or good lenders could collapse. 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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