There have been a lot of challenges in the global financial system.
This is identifiable in both traditional finance and more recently in the cryptocurrency market space. This has led to a great level of insolvency risk and possible bankruptcy experienced by businesses all over the world.
The cryptocurrency market has had its fair share of startups and even notable structured companies that have also experienced bankruptcy in a similar manner.
That was the recent case of crypto lender Voyager. But before diving into this, let’s go back a few steps to better understand the process of bankruptcy.
What is bankruptcy?
According to Wikipedia, “Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts”.
These literal terms can be a way of settling out indebtedness between parties.
The rate of interest and other factors like willingness to repay loans can, among other things, lead to the state of bankruptcy. This is experienced by corporations and also individuals, especially strong networth personalities.
The term bankruptcy can be used by both the traditional financial systems and more recently by other financial models in which blockchain technology and cryptocurrency projects are now fully involved in recent years.
What are cryptocurrency lenders?
Cryptocurrency lending refers to a branch or part of Decentralized Finance (DeFi) that allows investors either large or small to lend their cryptocurrencies to different borrowers.
Subsequently, this would enable the investors to get interest payments in exchange.
This is also called “crypto dividends” or return on investments. There are many platforms that specialize in lending crypto of which coins and tokens such as stablecoins can be paid as returns for investment.
Just like traditional finance investments, when you hold cryptocurrencies, the assets can get more value while you hold them without plans of selling them, and that is what crypto lending allows you to do.
Based on the high possibilities attributed to crypto lending, the borrowers can have the opportunity to stake or hold the trust in their cryptocurrency as guarantees of which the loan repayment can stand as security.
Thus, the investors will be able to sell the crypto assets if the borrower doesn’t pay off the loan anymore, meaning that they can recover the losses from the sales of the crypto assets.
What is the Voyager lending platform?
Voyager Digital is a US-based financial services platform that is involved with custody of customers’ funds and cryptocurrency assets with the potential of good returns on their investments.
The company was actively involved in lending assets to investors and created a niche for itself until recently.
Why is Voyager Digital filing for bankruptcy?
Voyager Digital has recently filed for bankruptcy in order to protect itself in Manhattan, New York after blaming the recent dump experienced in crypto markets. This has caused it to freeze funds from customer withdrawals.
Consequently, Voyager said it had over 3.5 million active users and over $5.9 billion in cryptocurrency assets in its custody at the time of its filing at the Manhattan court in New York.
However, the situation escalated as a result of the liquidity issues that arose from one of their borrowers Three Arrows Capital (3AC) who defaulted on repayments from funds borrowed to the tune of $650 million.
The company quickly expedited action by freezing accounts of their customers to prevent over withdrawals from those users and create unnecessary panic in the market space.
This has caused a lot of pain and untold hardship to customers as many recounted their losses and financial hardship due to their inability to withdraw their funds from the voyager platform.
What can be done to mitigate bankruptcy-related problems?
As a simple, yet basic rule in all investments, it is advisable to only invest as much as you are willing to lose.
This is such that your investment does not comprise all your entire savings as experienced in several failed projects and Ponzi schemes, which have been perpetuated and end up closing to the detriment of unsuspecting investors.
There is also the need to carry out extensive research on the various projects, which includes the methodology associated with the investment.
This evaluation helps to put the investor in a position to help them minimize the risk and potential of having a heavy loss when there is a negative financial impact on the investment.