Leverage in the cryptocurrency market is surging to levels reminiscent of the bull market days, even as recent events highlight the fragility of such exuberance. According to Galaxy Digital’s latest report, crypto-collateralized loans expanded by 27% in the last quarter, reaching $53.1 billion—marking the highest point since early 2022. This surge reflects a robust appetite for risk and record demand in DeFi lending, but last week’s market shakeout served as a stark reminder of how precarious these positions can be.
Fragile Foundations
Last Thursday witnessed Bitcoin’s dramatic retreat from $124,000 to $118,000, triggering over $1 billion in liquidations across crypto derivatives. This represents the largest long liquidation since early August. While some analysts have framed this as healthy profit-taking, it underscores the fragility of markets when leverage builds rapidly. As explored in Bitcoin’s Thin-Liquidity Bounce Raises Questions on Staying Power, the market’s ability to sustain these levels remains uncertain. Galaxy Digital’s analysts have been vocal about emerging stress points. In July, a surge of withdrawals on Aave led to ETH borrowing rates surpassing Ethereum’s staking yields, disrupting the economics of the popular “looping” trade. This resulted in a rush to exit staking positions, causing Ethereum’s Beacon Chain exit queue to hit a record 13 days.
Meanwhile, borrowing costs for USDC in the over-the-counter market have been on the rise since July, diverging from stable on-chain lending rates. The widening spread between these rates—now at its highest since late 2024—hints at off-chain dollar demand outpacing on-chain liquidity, a dynamic that could significantly amplify volatility if conditions tighten further.
The Bigger Picture
Even with institutional demand and ETF inflows painting a bullish backdrop, the burgeoning loan volumes and the concentration of lending power are raising eyebrows. There are also concerns about DeFi liquidity crunches and the growing gap between on-chain and off-chain dollar markets. Galaxy warns that the $1 billion liquidation event last Thursday is a cautionary tale: as leverage returns, it could swing the market both positively and negatively with increased force. This aligns with findings from Bitcoin can liquidate $18B with 10% price gain as traders see $120K next, highlighting the potential for significant market movements.
Bitcoin’s current trading price of $118,061.51 shows a modest increase of 0.44%, as traders cautiously bet on potential September rate cuts ahead of Jerome Powell’s Jackson Hole speech. However, some market watchers warn that this complacency might obscure underlying risks. On the Ethereum front, there’s a record $3.8 billion in Ether queued for unstaking, with a 15-day wait, which could add pressure for profit-taking. Despite this, demand from ETFs and treasuries keeps ETH trading at $4,524.10, up 2.13%.
Looking Ahead
As we look to the future, the crypto market stands at a crossroads. On one hand, there’s optimism fueled by institutional interest and financial innovations. On the other, there’s a growing recognition of systemic vulnerabilities that could lead to periods of heightened volatility. As the crypto landscape evolves, the question remains: Can the market sustain its growth without tipping into instability? The coming months will be telling, as regulators, investors, and market makers navigate this turbulent terrain.
In the midst of these developments, the broader financial ecosystem is abuzz with activity. Gold, for instance, is trading at $3,332.95, slightly down by 0.11%, as U.S. inflation data impacts Fed rate-cut expectations. The precious metal remains above the critical $3,310 support level, with many eyes on Powell’s upcoming speech.
In summary, while the crypto market is buoyed by renewed interest and expansion, the undercurrents of leverage and liquidity are shaping a complex narrative. As we move forward, these elements will undoubtedly play a pivotal role in determining the market’s trajectory.
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.
