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The price of Nexo (NEXO) continued to fall on June 15, as Nexo denied rumors of exposure to Three Arrows Capital (3AC), a Dubai-based crypto fund facing insolvency risks.
NEXO, which serves as a security token at a cryptocurrency lending platform of the same name, fell nearly 25% to $0.61 a unit, its lowest price reading since January 2021.
The massive intraday decline came as a part of a broader downside move this week, which stretched NEXO’s losses to 40%.
An ongoing contagion in the crypto lending sector contributed to NEXO’s underperformance.
Traders fear that most DeFi/CeFi firms, which offer high yields to clients on their cryptocurrency deposits, will default on their debts due to the wipeout of nearly $1.5 trillion from the crypto market in 2022.
The concerns continue to mount after the collapse of Terra, a $40 billion algorithmic stablecoin project, in May.
A month later, Celsius Network, which offers clients up to 18% yields, paused withdrawals due to “extreme market conditions.” Its clients have pulled almost half of their assets out of the platform since October 2021, thus leaving it about $12 billion as of May 17 to meet debt obligations.
Meanwhile, 3AC, a crypto hedge fund, has witnessed liquidations of at least $400 million. In addition, on-chain data reveals that the firm may also have a minimum debt of $183 million against a collateral position of $235 million (derived in Staked Ether).
The fund could transfer the economic risks to its lenders if it becomes insolvent.
“The lenders will bear the PnL [profit and loss] difference between how much they are owed versus what they get in liquidating their collateral,” noted Degentrading, a market commentator known for highlighting the Celsius Network’s liquidation issues.
He added: “That means defaults will cause SIGNIFICANT EQUITY erosion […] Not all lenders are made equal. Celsius is the worst. It has gone under. Nexo, I don’t know. BlockFi is pretty bad as well.”
However, Nexo says it currently has no exposure to 3AC despite partnering with the fund over a nonfungible token (NFT) lending product in December 2021. The firm asserts that the partnership with 3AC did not take off.
Nexo has 100% liquidity to meet its $4.96 billion worth of debt obligations, according to U.S.-based audit firm Armanino. That raises the firm’s potential to avoid a liquidity crisis in the event of a rising withdrawal rate, unlike Celsius.
Nonetheless, NEXO price treads ahead under persistent bearish risks, primarily due to the crypto market’s dire state in a high interest rate environment. The NEXO/USD pair now eyes the $0.58-$0.69 range as its interim support due to its historical significance from December 2020-January 2021.
A rebound from the $0.58-0.69 range could have NEXO bulls eye $0.883 as their interim upside target. This level was instrumental as support during the early-May price crash; it now coincides with the 0.786 Fibonacci retracement graph drawn from the $0.11-swing low to the $3.71-swing high.
Conversely, a decline below the $0.58-$0.69 range could have NEXO watch December 2020’s support level near $0.43, down around 35% from today’s price.