In a notable shift within the cryptocurrency market, recent indicators suggest a weakening in the strength of price rallies that have historically characterized the sector. After witnessing significant market capitalizations, such as an increase from approximately $2.7 trillion to $3.8 trillion in late 2024, and a spike from $1.7 trillion to $2.85 trillion between February and March of the same year, the current landscape presents a stark contrast. As of mid-2025, the market capitalization has only moved from $3.5 trillion to just under $4 trillion.
Despite remaining in a bull phase, experts point to stagnation as a significant issue, citing that growth has been predominantly driven by the borrowing sector in decentralized finance (DeFi). With the total value locked (TVL) in DeFi currently standing around $152 billion, nearly $49 billion has been borrowed across various protocols. A rough estimation indicates that to support this borrowing, approximately $123 billion in deposits would be necessary, representing around 81% of the total TVL. However, it’s important to recognize this figure encompasses multiple assets, including staking and liquidity pool balances, suggesting that while lending is a key aspect, it’s only one part of a larger equation.
The dominance of stablecoins in these borrowing trends further highlights the nature of current trading strategies. On platforms like Aave, stablecoins such as USDT and USDC account for significant borrowed amounts, with Aave alone seeing about $5.94 billion and $4.99 billion, respectively. This strategy underscores a preference among traders for using borrowed stablecoins not for holding volatile cryptocurrencies like ETH but rather for facilitating trading activities elsewhere, primarily on exchanges.
The recent data shows that spot exchanges have seen an increase in stablecoin reserves from $1.2 billion to $4.5 billion within a year, while derivative exchanges have soared from $26.2 billion to over $54 billion. This shift indicates that the majority of borrowed stablecoins are channeled toward derivatives platforms, where traders employ leverage to amplify their trading positions—sometimes up to fifty times.
However, the reliance on leveraged positions creates inherent risks. Current liquidation maps display a concerning trend, revealing that a substantial number of positions—particularly short positions—could trigger mass liquidations with even minor market fluctuations during rally attempts. This mechanism transforms what could be a robust rally into dramatic reversals, as the liquidation of long bets tends to have a destabilizing effect.
While short positions occasionally contribute to price spikes through short squeezes, they more often serve as hedging strategies and do not cause lasting price shifts as long positions do. Additionally, the borrowing costs associated with stablecoin loans encourage traders to utilize leverage aggressively, further reinforcing the cyclical nature of fleeting rallies that lack sustained momentum.
In conclusion, while the crypto market remains in a bullish phase, these intricate dynamics within the DeFi sector, characterized by an overreliance on lending and borrowing, illuminate why recent price rallies have faltered. The heavy influence of leveraged trading through borrowed stablecoins emerges as a critical factor, contributing to increased market fragility with each upward attempt. As the landscape continues to evolve, understanding these underlying mechanisms will be essential for participants navigating the turbulent waters of cryptocurrency trading.
