Bear markets are much more brutal for crypto lenders than cryptocurrency firms that don’t leverage users’ deposits, according to one Bitcoin analyst.

According to some industry experts, the ongoing bear market in cryptocurrency markets is too damaging for industry lenders, but the concept of crypto lending can still survive the bloodbath.

Cryptocurrency lending is a type of cryptocurrency service that allows borrowers to use their crypto assets as collateral to obtain loans in fiat currencies such as the US dollar or stablecoins such as Tether (USDT). Users can obtain funds without having to sell their coins and repay the loan at a later date.

Crypto firms that operate on a fractional-reserve basis, according to Josef Tětek, Bitcoin (BTC) analyst at the crypto cold wallet firm Trezor, face greater risks during bear markets.

The fractional-reserve model in traditional banking is a system in which only a portion of deposits are backed by actual cash. According to Tětek, crypto lending companies are “definitely running a fractional-reserve business” to provide yields to their customers.

“Exchanges and custodians that run on a fractional-reserve model are playing with fire. This practice may work fine during bull markets when such companies experience net inflows and grow their customer base,” the executive stated.

Sharp drops in cryptocurrency prices, according to Tětek, are more bearable for crypto businesses that do not provide lending services and do not leverage users’ deposits. This allows them to withstand the domino effect of falling prices and company failures.

“If you throw in leverage — trading with borrowed funds — the losses are often much more painful, especially with sudden price moves,” Tětek noted.

To survive the ongoing crypto lending crisis, cryptocurrency lenders must address a major issue involving short-term assets and short-term liabilities, according to the analyst, who stated:

“Crypto lending as a concept can survive this crisis, but the sector needs to get rid of the maturity mismatch problem: if someone else borrowed my assets and I get a yield as a return, then I have to wait for the borrower to repay before I can withdraw.”

Tětek went on to say that liquidity issues are inevitable for lenders that promise full liquidity on assets that are lent out at the same time.

“Every participant needs to respect the risks involved and the fact that there are no bailouts in the space, so if a borrower fails to repay, a lender has to accept their loss. There is no risk-free yield, and often the yield is not worth the risks,” he added.