Crypto lending firm Nexo (NEXO) risks losing half of its valuation by the end of 2022 as doubts about its potential insolvency grow in the market.

Is Nexo too centralized?

For the unversed: eight U.S. states filed a cease-and-desist order against Nexo on Sep. 26, alleging that the firm offers unregistered securities to investors without alerting them about the risks of the financial products.

In particular, the regulators in the state of Kentucky accused Nexo of being insolvent, noting that without its namesake native token, NEXO, the firm’s “liabilities would exceed its assets.” As of July 31, Nexo had 959,089,286 NEXO in its reserves. That’s 95.9% of all tokens in existence.

“This is a big, big, big problem because a very basic market analysis demonstrates that Nexo would be unable to monetize a significant chunk of these tokens,” noted @MikeBurgersburg, an independent market analyst and author of the Dirty Bubble Media Substack, adding:

“Given that fact, the true value of the $NEXO tokens on Nexo’s balance sheet is likely close to $0.”

Comparisons with Celsius

@MikeBurgersburg also alleged that Nexo faces insolvency risks because it holds the maximum chunk of NEXO token supply onto its platform. His allegations drew comparisons to Celsius Network, a now-defunct crypto lending firm that owned more than 50% of its native token, CEL.

NEXO risks 50% drop due to regulatory pressure and investor concerns
Top 100 NEXO holders collectively own 95.53% token supply. Source: Etherscan.io

Celsius ended up holding over 90% of the total CEL tokens in circulation after attracting deposits and collateral from customers. This made CEL extremely illiquid and, thus, volatile. In other words, CEL became a deeply imperfect asset for patching Celsius’s troubling balance sheets.

“NEXO token is even more illiquid than the bankrupt Celsius Network’s CEL token,” warned @MikeBurgersburg, noting that the token’s average daily trading volume comes to be less than 1% of its market capitalization.

But one of the Nexo spokespersons denied the allegations, clarifying that the data they provided to Kentucky regulators is of one of the Nexo Group’s entities. 

“We can confirm that on a consolidated basis, NEXO Tokens represent less than 10% of the company’s total assets,” he told Cointelegraph, adding:

“That, in return, exceeds the company liabilities even when excluding the company’s net position in NEXO Tokens.”

Answering why Nexo holds more than 90% of their NEXO supply, the firm’s spokesperson cited the token’s economics and utilities, saying that they create a natural incentive for clients to keep their tokens on the platform.

“In addition to earning higher interest rates on their digital asset balances by holding NEXO Tokens on the Nexo platform, clients can use NEXO Tokens as collateral, earn interest on them and exchange them directly on the Nexo platform,” he explained, adding:

“The same is true for the tokenomics of companies with similar value propositions such as FTT, BNB, CRO, held predominantly on FTX, Binance, and Crypto.com respectively.”

NEXO price could get rocky

The fear, uncertainty and doubt surrounding the rumors of market volatility or stringent regulation against crypto lending platforms could create negative investment sentiments toward NEXO. Unfortunately, the token’s technical setup suggests the same.

Related: Nexo acquires stake in US chartered bank

Notably, NEXO’s price has been forming what appears to be an ascending triangle on its longer-timeframe charts since June 12. Ascending triangles are considered bearish continuation patterns in a downtrend, which makes NEXO susceptible to extreme price declines.

By the rule of technical analysis, an ascending triangle resolves after the price breaks below its lower trendline and continues falling in the same direction until it reaches the level that is at length equal to the triangle’s maximum height.

This setup is illustrated in the chart below.

NEXO risks 50% drop due to regulatory pressure and investor concerns
NEXO/USD three-day price chart featuring ascending triangle breakdown setup. Source: TradingView

In the event that the pattern confirms, NEXO price could fall toward $0.47, down about 50% from today’s price.

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.