The current rally in crypto assets is so powerful because it combines leverage (cyclical) with a shift in portfolio allocation (structural).
BTC is the beneficiary of portfolio allocation, and ETH from growing demand for leverage since it’s the highest-grade collateral.
Here's a snapshot of leverage in the system.
1/ There are two ways to get crypto-native leverage: buying altcoins and borrowing. As natives become more allocated and exhaust their cash/stable coin reserves, they’ll resort to leverage via DeFi or on exchange.
2/ Leverage on exchanges is rising fast. Here’s rising aggregate open interest in crypto exchanges.
3/ Here’s CME open interest making new highs:
4/ In DeFi, borrowing against ETH collateral, especially in its yield-bearing forms (wstETH, rETH, cbETH), is the obvious way to get leverage. And borrowing demand is growing.
5/ In short, leverage in exchange looks elevated, ripe for liquidations and likely to exaggerate downside moves, but DeFi looks totally clear. ETH needs to get below $1,500 to see any meaningful liquidation risks on MakerDAO and AAVE, and then, we’re talking tiny numbers.
Ilan Solot
@isolot
Senior Global Markets Strategist - Macro & Digital Assets at Marex Solutions Personal views only here.