Cryptocurrency markets are feeling the pressure as leverage trades rise to levels reminiscent of the bull market, Galaxy Digital reports. This resurgence in leverage comes amid a backdrop of renewed risk appetite and escalating demand in DeFi lending, yet it also starkly highlights the market’s fragility. Just last week, Bitcoin’s rapid descent from $124,000 to $118,000 triggered a cascade of over $1 billion in liquidations, marking the most significant long position wipeout since early August.
A Ticking Time Bomb?
Galaxy Research’s latest report paints a complex picture of the current state of crypto leverage. Crypto-collateralized loans have surged by 27% in the last quarter, reaching $53.1 billion—the highest since early 2022. While this signifies a bullish sentiment, it also raises alarms about the market’s vulnerability. “The recent Bitcoin liquidation was more a bout of profit-taking than a reversal,” notes one analyst, “but it underscores how precarious things get when leverage balloons.” This is further compounded by Bitcoin’s thin-liquidity bounce, which raises questions about the staying power of such market movements.
In July, a significant wave of withdrawals from Aave pushed Ethereum (ETH) borrowing rates higher than staking yields. This upset the economics of “looping” trades—where staked ETH serves as collateral to borrow more ETH—triggering a rush to exit staking positions. Consequently, Ethereum’s Beacon Chain exit queue hit a record 13-day wait time. Such stress points illustrate the brittle nature of current market dynamics.
The Dollar Dilemma
Moreover, Galaxy highlights a growing disparity in borrowing costs for USDC. In the over-the-counter market, these costs have been climbing since July, while on-chain lending rates remain flat. This widening spread suggests an off-chain demand outstripping on-chain liquidity, potentially setting the stage for amplified volatility should financial conditions tighten further.
Despite these concerns, the bullish sentiment in the crypto market remains buoyed by ongoing institutional demand and ETF inflows. However, the system is undeniably showing signs of strain. Between soaring loan volumes and a liquidity crunch in DeFi, the gap between on-chain and off-chain dollar markets is widening—a situation that could spell trouble if left unchecked.
Uncertain Terrain Ahead
As we look forward, the crypto landscape is peppered with uncertainty. BTC is currently trading at $118,061.51, experiencing a modest uptick of 0.44%, while ETH has seen a 2.13% increase, trading at $4,524.10. But with a record $3.8 billion in Ether queued for unstaking and a 15-day wait time, the potential for profit-taking pressure looms large. A stark contrast is seen in the gold market, where prices are consolidating following hotter-than-expected U.S. inflation data, with gold trading at $3,332.95. For a deeper dive into potential market movements, see our analysis on Bitcoin’s ability to liquidate $18B with a 10% price gain.
The recent volatility serves as a cautionary tale of leverage’s double-edged nature. As the market braces for Jerome Powell’s upcoming Jackson Hole speech, traders are betting on rate cuts in September. However, some caution that this complacency might obscure underlying risks.
The crypto ecosystem is at a crossroads. With leverage on the rise and market dynamics in flux, the coming months will test the resilience of digital assets. Whether the current stress points can be alleviated or will lead to more significant market disruptions remains a pivotal question. As the landscape evolves, market participants would be wise to tread carefully.
Source
This article is based on: Asia Morning Briefing: Crypto’s Rising Leverage Trades Show Signs of Stress, Galaxy Digital Says
Further Reading
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Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
