The crypto market continues to display strong bullish momentum in 2025, but recent data highlights underlying risks as leverage builds to levels last seen during the 2021 bull run. According to Galaxy Digital’s latest research, crypto-collateralized loans surged 27% last quarter, reaching $53.1 billion—the highest since early 2022. While institutional demand and ETF inflows remain supportive, the return of heavy leverage is raising fresh concerns about stability.
Leverage on the Rise in Crypto
Galaxy Digital’s State of Crypto Leverage report shows that appetite for risk has returned, fueled by booming decentralized finance (DeFi) lending and renewed institutional interest. However, last week’s sudden market correction provided a stark reminder of how quickly things can unwind.
Bitcoin (BTC) slipped from highs of $124,000 to $118,000, triggering more than $1 billion in liquidations across crypto derivatives markets. This marked the largest single-day long wipeout in August and underscored the fragility of a market where borrowing levels are climbing rapidly.
Analysts described the move as “healthy profit-taking” rather than the start of a reversal, but the magnitude of liquidations shows just how sensitive the system has become.
Stress Points Emerging in DeFi
One of the most notable developments is the rising cost of borrowing in the crypto market, particularly for stablecoins like USDC. Galaxy’s report noted that borrowing rates in the over-the-counter market have surged, while on-chain lending rates have remained relatively flat. This disconnect points to a liquidity mismatch that could amplify volatility if conditions tighten further.
In July, withdrawals on Aave, a leading DeFi protocol, drove ETH borrowing costs above Ethereum’s staking yields. This disrupted the popular “looping” trade—where staked ETH is used as collateral to borrow more ETH—and forced many investors to unwind positions. As a result, Ethereum’s Beacon Chain exit queue spiked to a record 13 days, signaling investor unease.
Bitcoin, Ethereum, and Market Sentiment
Despite recent turbulence, crypto markets remain buoyed by strong institutional interest. Spot Bitcoin ETFs have continued attracting inflows, while Ether demand remains robust with a record $3.8 billion queued for unstaking.
As of today, Bitcoin is trading near $118,000, while Ethereum sits around $4,500. Both assets are supported by long-term bullish narratives, but traders are cautious given the widening gap between on-chain and off-chain liquidity.
Market watchers are also eyeing U.S. Federal Reserve commentary, particularly Jerome Powell’s upcoming speech at Jackson Hole, which could impact both traditional and crypto markets if interest rate expectations shift.
Why Rising Leverage Matters
The return of high leverage in the crypto industry is a double-edged sword. On one hand, it signals confidence, liquidity, and investor risk appetite. On the other, it magnifies volatility and can trigger cascading liquidations during sudden price corrections.
Galaxy Digital warns that ballooning loan volumes, concentration of lending power, and ongoing liquidity mismatches are creating fault lines in the system. While the broader outlook remains constructive thanks to ETFs and institutional adoption, the sharp $1B liquidation last week is a warning that leverage can cut both ways.
Outlook: Bullish but Fragile
Looking ahead, experts believe the crypto market is entering a period of cautious optimism. Institutional adoption, stablecoin growth, and blockchain innovation are fueling long-term bullish momentum. However, short-term risks remain elevated as leverage accelerates faster than liquidity.
For investors, the key takeaway is balance: while the crypto sector continues to offer outsized opportunities, it also demands disciplined risk management. Traders should remain vigilant, especially as volatility may rise heading into September.
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