Analysts are divided on whether the potential NFT liquidation event is a buy-the-dip opportunity.
Many owners of precious Bored Ape Yacht Club (BAYC) and CryptoPunks NFTs, who used them as collateral to take out loans in Ether (ETH), have failed to repay their debts. The situation could lead up to the NFT sector's first massive liquidation event.
BAYC "death spiral" incoming?
DoubleQ, the founder of web3
launchpad Double Studio, says lending service BendDAO could liquidate up
to $55 million worth of NFTs to recover its loans, fearing the
so-called "health factor" of these debts could fall below 1.
Notably,
an NFT collection's floor price is important in determining the health
factor. BendDAO offers 30%-40% of the NFT's floor price as loans. But
the protocol sells the NFT if its floor price falls too close to the
amount borrowed—a liquidation threshold, as explained below.
Meanwhile, the floor price of BAYC has fallen
from 153.7 ETH in May to 69.69 ETH in August—a nearly 55% plunge in
three months. Simultaneously, the health factor of at least 20 loans
with BAYC as collateral has fallen to 1.1 as of Aug. 19, data on BendDAO
shows.
Borrowers have 48 hours to repay the loan or their NFT collateral
will be liquidated. According to doubleQ, these liquidations could lead
to "a death spiral for the BAYC ecosystem and NFT market as a whole,"
given BendDAO's exposure to other NFT projects, including CryptoPunks
and Doodles.
"OpenSea volume is at the lowest point ever in the last 12 months," the analyst warned, adding:
"There's simply not enough volume to save these liquidations.. It's inevitable."
OpenSea is the leading NFT marketplace by volume.
To buy the dip or not?
Nevertheless, doubleQ believes the incoming BAYC liquidation could offer an opportunity to buy the NFTs at cheaper rates.
On the other hand, Naimish Sanghvi, CEO of India-based crypto news
outlet Coin Crunch, wonders if there would be any buyers due to a lack
of arbitrage opportunities.
"Your bid has to be more than 95% of the floor value and higher than the debt amount," explained Sanghvi, noting that there could no room for making money from arbitrage between these values.
"The
auctions don’t begin until the first bid is placed, so there may be
several NFTs in limbo at a given point in time if the prices are
unfavorable. And that should scare the Liquidity providers."
This
scenario would have BendDAO wait for borrowers to repay their loans—or
to wait for the re-emergence of liquidators after a market recovery—to
subside its "temporary floating loss."
The
views and opinions expressed here are solely those of the author and do
not necessarily reflect the views of Cointelegraph.com. Every
investment and trading move involves risk, you should conduct your own
research when making a decision.
source link : https://cointelegraph.com/news/nearly-55m-worth-of-bored-ape-cryptopunks-nfts-risk-liquidation-amid-debt-crisis
