Distinctive Risk Warnings
Understanding the Risks of Crypto-Backed Loans
Crypto-backed loans are known for their potential to provide financial liquidity while retaining your collateralised crypto assets. Despite this advantage, it is paramount that you comprehend and acknowledge the risks that come with crypto-backed loans. More specifically, you must appreciate the complexities of the crypto market dynamics, including the potential for high volatility and/or low liquidity, and ensure that they are covered by your risk management strategy.
Down below, you can find a breakdown of the risks associated with crypto-backed loans.
Over-Collateralization
Over-collateralisation is one of Nexo's core principles. This means you as a borrower need to pledge cryptoassets that exceed the value of the loan you are withdrawing. This may pose significant risks for you, as you may need to provide additional collateral to maintain the required Loan-to-Value (LTV) ratio.
Over-collateralisation also provides a certain degree of protection to the platform and its users. By ensuring that the value of the collateral exceeds the loan amount, Nexo minimises the risk of losses due to borrowers losing their collateral.
It's important for you as a client to fully understand the implications of over-collateralisation before taking out a loan. You should carefully monitor the value of your collateral and be prepared to take action if necessary to avoid liquidation. This might involve closely watching market trends, setting up price alerts, or using automated tools to manage your collateral.
Price Devaluation
Crypto asset prices are affected by factors such as global economic and non-economic events, demand and supply, interest rates and currency exchange rates, cyber theft from digital wallets, market regulation measures, and the popularity of businesses offering crypto-related services. Overall, negative sentiment fueled by influences, news, allegations, or events pertaining to the blockchain space can also have an adverse effect on the crypto market at large and the value of certain crypto assets in particular.
For instance, some crypto assets have experienced daily price volatility exceeding 20%. Moreover, such rapid price changes might occur at any time, including outside of normal business hours, since the crypto market operates 24/7.
Sharp declines in crypto asset prices can have a drastic impact on the value of your collateral. If the latter falls below a certain threshold, it will be liquidated to cover the loan.
Low Liquidity
Low liquidity is another risk to consider while dealing with crypto-backed loans. It is commonly associated with events such as the de-pegging of a stablecoin currency* that causes assets that typically maintain a high Loan-to-Value (LTV) ratio to rapidly lose value. If the resulting collateral depreciation outpaces the platform’s ability to liquidate the asset on time to obtain sufficient repayment value, it may leave the outstanding loan under collateralised.
Assets associated with a low LTV are not exempt from such risks either. Due to their inherently low liquidity and utility combined with high volatility, they are prone to rapid loss of value, leading to the same result - leaving your loan undercollateralised.
In summary, while crypto-backed loans might appear enticing, they come with their own risks that every investor should acknowledge and understand. Always be sure to assess these risks when defining your financial goals.
Technological Developments
The crypto lending landscape, by its very nature, is inextricably linked with the cutting-edge technologies that underpin it. These technologies don't exist in a vacuum and are perpetually evolving, often leading to unpredictable impacts on the value and stability of crypto assets. Any breakthroughs can lead to a considerable shift in the market dynamics, which may significantly impact the collateral of the crypto credit.
To gain a broader understanding of Nexo’s Borrow product and its underlying mechanisms, please refer to the articles below:
Understanding the Risks of Nexo Booster
The Nexo Booster is a tool that allows you to amplify your position in a specific cryptoasset on credit. When using the Nexo Booster, you receive a loan that is used along with your chosen digital asset to buy one specific cryptoasset – all through a single operation.
While the Booster uses the Nexo Exchange mechanism in order to improve the immediacy of your chosen operation with the aim of limiting slippage, at its core, it is an extension of our Crypto-Backed Loans. As such, all of the above-mentioned Distinctive Risk Warnings are fully applicable to the Nexo Booster.
Risk of Collateral Liquidation
The total amount acquired through the Nexo Booster, including the funds forming the base for the credited amount, is automatically transferred to your Credit Line Wallet as collateral.
The value of your assets in the Credit Line Wallet is continuously monitored against the outstanding loan amount. This is because the value of cryptoassets can be extremely volatile, fluctuating significantly within short periods. Therefore, if the value of your assets decreases drastically, they may not be enough to cover the loan amount you owe
Be aware that if the value of your assets decreases drastically, they may not be enough to cover the outstanding loan amount.
In such scenarios, you may face a margin call. A margin call is a demand by Nexo that you top-up additional cryptoassets into your Credit Line Wallet to bring the value of the collateral back in line with the outstanding loan amount. If you don't fulfil this requirement or if the value of your cryptoassets continues to fall to a point where it cannot cover your liabilities, you may face collateral liquidation.
Repayment Obligations
As with any Crypto-Backed Loan, a loan received through the Nexo Booster must be repaid regardless of the market conditions or the price performance of your cryptoassets. The fluctuating nature of the crypto market does not exempt you from your repayment responsibilities, regardless of the loan purpose.
The cryptoassets in the Credit Line Wallet associated with the Nexo Booster transactions may increase or decrease in value. Should they appreciate in value, the profit cannot be accessed or used until the outstanding loan has been fully repaid. Conversely, any decrease in the value of the cryptoasset in the Credit Line Wallet does not reduce the amount of your outstanding debt.
Therefore, it's crucial to plan your actions accordingly, considering the loan repayment as a priority, irrespective of the performance of your cryptoassets.
*Stablecoin de-pegging refers to the situation where a stablecoin, which is typically pegged to a specific value or asset (like the US dollar), deviates from its pegged value. This can occur due to various factors like market volatility, lack of liquidity, or issues with the underlying collateral. This can create uncertainty and risk, as the stablecoin is no longer fulfilling its primary function of maintaining a stable value