Key Points
- Market signs indicate a potential overheating due to escalating leverage in both centralized and decentralized finance sectors.
- Bitcoin’s price dip below $69,000 and increasing borrow costs are sparking concerns of a potential correction.
The head of research at IntoTheBlock has issued a warning that the market seems to be overheating. This is due to a rise in leverage in both centralized and decentralized finance sectors.
Bitcoin’s Price Dip and Market Overheating
Bitcoin’s price has retraced from its peak and dipped below $69,000. This has led to analysts at IntoTheBlock to express concerns about the market overheating and a potential correction.
In a post on March 15, Lucas Outumuro, head of research at IntoTheBlock, discussed the growing leverage in both decentralized finance (defi) and centralized finance (cefi) markets. He suggested that an adjustment might be imminent.
Leverage and the Crypto Market
Outumuro pointed out that not only are meme tokens shooting up, but the leverage behind large cap assets has also rapidly increased. This is seen in derivatives markets where borrowing costs to go long have reached their highest since 2021.
On centralized exchanges, funding rates are at abnormally high levels. Outumuro added that even though exchange-traded fund (ETF) flows might continue to carry spot prices for now, the overly bullish positioning in derivatives is a warning sign for the market.
The increase in leverage isn’t limited to centralized exchanges. It also extends to defi platforms. Outumuro noted that the total debt issued through Aave v3 on Ethereum has more than doubled year-to-date.
Outumuro warned of a potential “Great Unwinding” in the crypto market. He expects a 20% correction as the amount of leverage in the system gets reset. The exact timing of such a correction is uncertain. However, the rising borrowing costs are a cautionary signal for crypto investors to be prudent in their trading strategies. As of the time of the report, Bitcoin was trading at $67,819.
