Global financial markets will continue to be impacted by the geopolitical crisis between Russia and Ukraine. Concerns about the possibility of a global liquidity crisis following the shutdown of the nickel market are alarming institutional investors.
“Recent data reinforce this cautious investor sentiment but the crypto market has remained relatively resilient given the circumstances,” said Ariel Liu, Head of Huobi Brokerage, a subsidiary under Huobi Technology (stock code: 1611.HK). She advised institutions and investors in this vertical to make appropriate adjustments in the underlying assets and gearing ratio to better prepare for a potential market shock.
A looming liquidity crisis?
Nearly half of Russia’s $640 trillion USD foreign reserve has been frozen, and the rest can barely satisfy the liquidity requirements for offshore USD following its exit from SWIFT, causing a liquidity drain in the global market. Tightening liquidity along with volatility in commodity price ignited by sanctions has forced traders to seek liquidity from other markets. Meanwhile, the LIBOR-OIS spread rose to 25 basis points, the highest since June 2020.
“We are keeping a close eye on the data and witnessing relative resilience in the virtual asset market”, added Liu. “Lending rates of USDT, BTC and ETH are flattening out with sharp increases last week.”
Recently, Huobi Brokerage launched its limited-time offer of interest-free loans for up to $100 million USDT, supporting more than 30 popular cryptocurrencies and stablecoins to help investors tap market opportunities and support the liquidity supply. Liu expanded, “It’s important to note that compared to the traditional finance market, the scale of the virtual asset market is still relatively small, making available tools still inadequate. Remaining cautiously optimistic while adjusting the underlying assets and gearing ratio may be the best strategy at the moment.”
A maturing liquidity supply in the virtual asset market
Analogous interbank markets in crypto are flourishing with the rapid development of the virtual asset market. Huobi Tech is one of the eligible service providers offering virtual asset management, custody, trust, lending, and OTC services. As of the fourth quarter of 2021, the assets under custody by Huobi Tech have reached $4 billion USD in a year. Genesis and BlockFi, two well-known virtual asset institutions, are also expanding in Asia to ride the waves in this promising market.
“With the presence of more service providers, the virtual asset market becomes more and more mature while the ability to hedge against volatility and liquidity crisis is improving,” says Romeo Wang, Senior Vice President of Huobi Tech.
DeFi is another solution for increasing liquidity supply in the virtual asset market. But in November 2019, the price of ETH dropped more than 30%, which triggered substantial liquidations that wiped out assets of some of the lenders of crypto-backed loans. The biggest DeFi service provider MakerDAO has also made a major adjustment to its strategy.
“CeFi and DeFi are not rivals in a zero-sum game,” added Wang. “Instead, they can work together to provide diversified options to clients. Affected by various external market factors in different phases, these two offer different benefits for addressing different risks. With the current geopolitical turmoil and market volatility, flexibility in CeFi could protect clients with additional buffers against extremely risky events, so we advise our clients to stay well-positioned and cautious to deal with more frequent black swan events.”
Disclaimer: This is a paid post and should not be treated as news/advice.