Crypto leverage is soaring again as traders ramp up risky positions, and Galaxy Digital warns that signs of market stress are starting to emerge. The cryptocurrency market is experiencing a renewed appetite for leverage, reaching levels last seen during previous bull cycles.

DeFi Lending Fueling a Leverage Comeback

According to Galaxy Research’s Q2 State of Crypto Leverage, crypto-collateralized loan activity surged by 27% last quarter, totaling $53.1 billion. That marks the highest leverage volume since early 2022. Much of this growth is attributed to increased demand for decentralized finance (DeFi) lending platforms and a revived appetite for market risk.

This aggressive leveraging fueled last week’s cascade in the markets. Bitcoin, for instance, tumbled from $124,000 to $118,000, which triggered over $1 billion in derivative liquidations—one of the largest long-side collapses in weeks. Analysts have called this correction a natural period of profit-taking but also cautioned that excessive leverage can increase fragility.

Ethereum Markets Show Strains in Looping Strategies

In July, Ethereum’s DeFi borrowing market signaled early stress when borrowing costs on Aave spiked beyond staking rewards, as noted in CoinDesk’s report. The strategy known as “looping,” where staked ETH is borrowed against to acquire more ETH, began to unravel. As returns no longer justified the risk, users quickly unwound these positions. The Ethereum Beacon Chain saw its exit queue inflate to a record 13 days as stakers rushed to withdraw.

On-Chain vs. Off-Chain Liquidity Discrepancies

Galaxy’s analysis also points to growing friction in stablecoin lending markets. Since July, borrowing costs for USDC in over-the-counter settings have climbed, despite consistent rates on DeFi platforms. This divergence between off-chain and on-chain rates is now at its widest margin since late 2024. It suggests that demand for off-chain liquidity is surpassing available supply, a mismatch that could contribute to future volatility if left unchecked.

Despite these red flags, institutional flows and ETF demand remain strong. This has supported a generally optimistic outlook, but experts caution that the increasing leverage and liquidity distortions need to be closely monitored.

How Market Movers Are Reacting

BTC: Bitcoin is trading at $118,061.51, gaining 0.44%. However, volatility has dropped significantly as investors await critical signals from Federal Reserve Chair Jerome Powell during the upcoming Jackson Hole meeting. While some bet on rate cuts, others warn that this calm may conceal deeper market risks.

ETH: Ether’s dynamics reflect the leverage stress. A historic $3.8 billion worth of Ether is now waiting to be unstaked, causing delays of up to 15 days. With ETF and treasury interest increasing, ETH climbed 2.13% to $4,524.10, but selling pressure may rise as investors attempt to realize gains.

Gold: The yellow metal is holding steady above $3,310, currently at $3,332.95—down 0.11%. Recent U.S. inflation data has dampened expectations for imminent Fed rate cuts, adding to the wait-and-see attitude ahead of Powell’s remarks.

Leverage exposure in crypto derivatives reached new highs last quarter, according to Galaxy Research.

Related: XRP Price: $12M Max Pain for Bears

Industry Developments to Watch

• 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)

Galaxy Digital’s insights offer both a warning and a map. While the crypto market sees renewed institutional confidence, the undercurrents of leverage stress and liquidity gaps suggest caution is warranted as the cycle matures.