“Crypto’s Deleveraging Cycle Won’t Last Much Longer”- JP Morgan

According to JP Morgan Chase & Co., the current phase of crypto deleveraging is at an advanced stage and may not last much longer. In a report on Wednesday, JP Morgan said that the collapse of crypto hedge fund Three Arrows Capital (3AC) indicates that the ramifications of this year’s cryptocurrency market slump continue to reverberate. According to various reports, the digital asset market capitalization has faced around a 70% drop since last November. This leads to the failures of multiple companies in this industry. 

“Whether it is miners having borrowed to expand operations using their bitcoin as collateral, corporates such as MicroStrategy (MSTR) having borrowed in the past to invest even more heavily into bitcoin, or hedge funds using futures to lever their positions, or retail investors borrowing via margin accounts to invest in various cryptocurrencies. The failure of Three Arrow Company is a manifestation of this deleveraging process and the process seems to be well advanced making the bottom formation process in crypto markets more volatile”, he said.

“Crypto’s Deleveraging Cycle Won’t Last Much Longer”- JP Morgan

Also, the crypto analysts and strategists say, “the current deleveraging cycle may not be very protracted. The fact that crypto entities with the stronger balance sheets are currently stepping in to help contain contagion and that venture-capital funding, an important source of capital for the crypto ecosystem, continued at a healthy pace in May and June”. 

The total market cap was down to around $930 billion last Thursday and the whole crypto market has faced a number of failures in recent months. This includes the collapse of the Terra/Luna ecosystem in May, the failure of Three Arrows Capital, and frozen withdrawals at crypto lenders like Celsius Network. 

“Bitcoin (BTC) miners are another source of stress for crypto markets, given the pressure to sell their tokens to deleverage or to cover the cost of their operations. Selling of bitcoins by miners intensified in June and will likely continue into the third quarter”, JP Morgan said. 

The two reasons identified by JP Morgan to suggest that the crypto’s deleveraging cycle may not be very protracted are: more and more crypto companies are stepping in to help contain contagion that too with more robust balance sheets and the venture capital (VC) funding continued their healthy pace which is an important source of capital for the digital assets ecosystem. 

In this bear market, the most vulnerable crypto entities are those with higher leverage and this includes those bitcoin miners who had borrowed to expand operations using their bitcoin as collateral. Also, retail investors who borrowed through margin accounts to invest in various cryptocurrencies and those hedge funds that use futures to lever their positions are also the main reasons for the vulnerability faced by the cryptocurrencies.