Leverage in the cryptocurrency markets is once again on the rise, reaching levels reminiscent of a bull market. Despite a recent pullback last Thursday, which served as a stark reminder of the risks associated with overextended positions, traders continue to ramp up their bets.
According to Galaxy Research’s Q2 report on the State of Crypto Leverage, crypto-collateralized loans saw a 27% increase last quarter, reaching $53.1 billion – the highest level since early 2022. This surge was fueled by record demand in DeFi lending and a renewed appetite for risk-taking.
The stage was set for last week’s market shakeout when Bitcoin dropped from $124,000 to as low as $118,000, triggering over $1 billion in liquidations across crypto derivatives. This marked the largest long liquidation event since early August, serving as a cautionary tale of the rapid unwinding that can occur when leverage becomes too excessive.
Analysts at Galaxy point out that stress points are already beginning to emerge in the market. In July, a wave of withdrawals on Aave led to ETH borrowing rates surpassing Ethereum’s staking yields, disrupting the popular “looping” trade strategy. This, in turn, caused a rush to exit staking positions, resulting in Ethereum’s Beacon Chain exit queue reaching a record 13 days.
Additionally, borrowing costs for USDC in the over-the-counter market have been steadily climbing since July, while on-chain lending rates remain flat. This disparity has created the widest spread between the two since late 2024, indicating a mismatch between off-chain dollar demand and on-chain liquidity. Such discrepancies could exacerbate volatility if market conditions continue to tighten.
Despite these warning signs, institutional demand and ETF inflows are still propping up the bullish sentiment around crypto. However, with mounting loan volumes, concentrated lending power, DeFi liquidity crunches, and growing discrepancies between on-chain and off-chain dollar markets, the system is showing increasing points of stress.
The $1 billion liquidation event last Thursday served as a stark reminder that the resurgence of leverage in the market carries risks on both ends of the spectrum.
In other market news, volatility has subsided across various asset classes ahead of Jerome Powell’s Jackson Hole speech, with traders anticipating potential rate cuts in September. Bitcoin is currently trading at $118,061.51, up 0.44%, while Ethereum is at $4,524.10, up 2.13%. Gold, on the other hand, is trading at $3,332.95, down 0.11%, as U.S. inflation data influences rate-cut expectations.
In the wider crypto landscape, stablecoin proliferation has made crypto ramps more appealing as M&A targets, according to VanEck VC. Companies like Circle and Stripe are also venturing into launching their own blockchains, while Gemini has enlisted top-tier financial institutions as lead bookrunners for its upcoming IPO. There are countless benefits to staying physically active and incorporating exercise into your daily routine. From improving your overall health to boosting your mood, exercise has the power to transform your life in more ways than one.
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