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Leverage in crypto markets is surging back to bull-market levels, even as last Thursday’s pullback reminded traders how quickly overextended bets can unwind.

Galaxy Research’s Q2 State of Crypto Leverage shows crypto-collateralized loans expanded 27% last quarter to $53.1 billion, the highest since early 2022, powered by record demand in DeFi lending and a renewed appetite for risk.

That backdrop set the stage for last week’s shakeout.

Bitcoin’s retreat from $124,000 to as low as $118,000 triggered more than $1 billion in liquidations across crypto derivatives, the largest long wipeout since early August. Analysts framed it as healthy profit-taking rather than the start of a reversal, but it underscored how fragile the market becomes when leverage builds this quickly.

Galaxy's analysts argue that stress points are already visible.

In July, a wave of withdrawals on Aave pushed ETH borrowing rates above Ethereum’s staking yields, breaking the economics of the popular “looping” trade where staked ETH is used as collateral to borrow more ETH. The unwinding triggered a rush to exit staking positions, sending Ethereum’s Beacon Chain exit queue to a record 13 days.

Galaxy has also flagged that borrowing costs for USDC in the over-the-counter market have been climbing since July, even as on-chain lending rates remain flat.

The spread between the two has widened to its highest level since late 2024. That disconnect suggests demand for dollars off-chain is outpacing liquidity onchain, creating a mismatch that could amplify volatility if conditions tighten further.

With institutional demand and ETF inflows still supporting the bullish backdrop, strategists remain constructive on crypto.

But between ballooning loan volumes, concentration of lending power, DeFi liquidity crunches, and a widening gap between on-chain and off-chain dollar markets, the system is showing more points of stress, Galaxy writes.

Thursday’s $1B flush was a warning that the return of leverage is cutting both ways.

Market Movers

BTC: Volatility has plunged across markets ahead of Jerome Powell’s Jackson Hole speech, with traders betting on September rate cuts, but some warn complacency could mask risks as BTC trades at $118,061.51, up 0.44%.

ETH: A record $3.8B in Ether is queued for unstaking with a 15-day wait, adding potential profit-taking pressure even as ETF and treasury demand surges, with ETH trading at $4,524.10, up 2.13%.

Gold: Gold is trading at $3,332.95, down 0.11%, as hotter U.S. inflation data cut Fed rate-cut bets and left XAU/USD consolidating above key $3,310 support ahead of Powell’s Jackson Hole speech.

Elsewhere in Crypto

• Stablecoin Boom Has Made Crypto Ramps 'Sexier' M&A Targets, Says VanEck VC (Decrypt)
• Why Circle and Stripe (And Many Others) Are Launching Their Own Blockchains (CoinDesk)
• Gemini Hires Goldmans, Citi, Morgan Stanley and Cantor as Lead Bookrunners For its IPO (CoinDesk)

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