Crypto leverage spikes and signs caution to investors: IntoTheBlock

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The crypto market’s temperature is rising, with the top 20 crypto-assets, excluding stablecoins, boasting an average 90-day return of 103% according to IntoTheBlock data. Even the group’s laggard has surged 28%. Meme tokens are not the only assets experiencing a surge, with large-cap crypto also seeing a rapid increase in leverage usage, as the cost to borrow for long positions has hit a peak not seen since 2021.

Funding rates for Bitcoin perpetual swaps have reached their highest levels since October 2021. On platforms like Binance and Bybit, these rates have escalated to 0.06% and 0.09% respectively, calculated every eight hours. These rates translate to an annualized cost of 93% and 168% for those looking to go long on Bitcoin. Such elevated funding rates suggest a market heavily skewed towards bullish bets.

Despite the potential for exchange-traded fund (ETF) flows to buoy spot prices temporarily, the current bullish stance in derivatives is a harbinger of potential market instability. The trend of high leverage is not confined to centralized exchanges, as the decentralized finance (DeFi) sector is also experiencing a rapid increase in borrowing. In 2024, the total debt issued through Aave v3 on Ethereum has more than doubled.

As Bitcoin carves out new all-time highs, investors are increasingly leveraging their holdings. The amount of wrapped Bitcoin (WBTC) supplied to Aave has swelled by over 10,000 BTC, valued at approximately $700 million. With this surge in demand for leverage, interest rates in the DeFi space have also climbed, signaling a market that may be over-leveraged and at risk of a correction.

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