Crypto Leverage Survived Stress Test, Market Shows Resilience

Crypto Leverage Survived Stress Test, Market Shows Resilience

The cryptocurrency market experienced a significant test in the fourth quarter of last year, particularly concerning the use of leverage, which allows traders to borrow funds to increase their potential profits (or losses). A new report from Galaxy Research, titled “The state of crypto leverage Q4 2025 surviving a stress test,” suggests that despite a massive liquidation event in October, the crypto credit markets have shown surprising strength and maturity.

Centralized vs. Decentralized Lending: A Tale of Two Markets

The report highlights a stark contrast between lending in centralized finance (CFI) and decentralized finance (DeFi). By the end of Q4, open borrowing in CFI platforms reached over $27 billion, an 11% increase from the previous quarter. This marked eight consecutive quarters of growth, with CFI borrowing soaring 280% since the market’s low in Q4 2023. However, this figure is still below the peak of $37 billion seen in Q1 2022.

Coinbase stood out in Q4, recording its largest quarterly loan growth ever by adding approximately $438 million in new loans. Tether remained the dominant force in CFI lending, controlling 61% of the market. Maple Finance and Galaxy also secured significant shares, with the top three lenders collectively holding 75% of the CFI lending market.

In contrast, outstanding DeFi loans fell by 24% in Q4, totaling about $33 billion. This decline was attributed to several factors, including less profitable looping strategies after the October liquidation event and a general decrease in risk appetite. Additionally, unusually low borrowing costs in CFI made off-chain borrowing more attractive than on-chain options.

Combined, total crypto-collateralized borrowing stood at roughly $61 billion by the end of Q4, an 11% drop from Q3. Despite this decrease, the total borrowing amount was still higher than the peak seen during the 2020-2021 market cycle.

DeFi Lending Shrinks, But Remains Key

DeFi lending apps accounted for 54% of total lending across both DeFi and CFI by the end of the year, down from 64% in Q3. The report details that outstanding borrows on DeFi apps have shrunk significantly, by 40% from their all-time highs, with most of this activity concentrated on the Ethereum network.

The report also examined collateralized debt position (CDP) stablecoins, which are over-collateralized with crypto. While the supply of CDP stablecoins saw a 3% increase from Q3 to Q4, some data may overlap due to firms using them to fund off-chain loans. Overall, total crypto-collateralized lending fell nearly 10% in Q4 to just under $70 billion.

Futures Market Reeling from Liquidations

The futures market saw a dramatic drop in open interest, including perpetual futures, which fell by almost 40% in Q4. This was largely a consequence of the October 10th liquidation event, the largest in crypto’s history, which wiped out nearly $20 billion in a single day. Bitcoin and Ethereum futures open interest each fell by about 34%, with Solana futures experiencing an even steeper decline.

Binance held the largest share of the open interest perpetual futures market at 20% by the end of Q4, followed by CME and Gate. Perpetual futures, which represent agreements to buy or sell an asset at a future date at a predetermined price, still account for about 80% of open interest, though this percentage has remained largely unchanged.

Corporate Debt and Future Outlook

Digital asset treasuries (DATs), companies holding crypto on their balance sheets, had over $14 billion in outstanding debt through Q4 to bolster their reserves. This debt remained relatively flat during the quarter. The earliest debt maturities are not due until June 2027, with significant repayment periods not arriving until Q2 to Q4 of 2028.

Interestingly, VHF Parent LLC, a subsidiary of Virtue Financial, faces the highest quarterly interest burden at $66.2 million, surpassing even Michael Saylor’s Strategy, which pays $17.5 million quarterly. Total crypto-related debt outstanding in Q4 was $84 billion, a slight reduction from the all-time high of over $91 billion in Q3.

A Maturing Market

The report concludes that Q4 acted as a major stress test for crypto, with largely positive outcomes. While leverage decreased and speculative strategies became less viable, the process was orderly. CFI lenders absorbed significant liquidations without causing a wider collapse, and DeFi protocols functioned as designed, automatically deleveraging as prices fell.

The future of leverage in crypto appears to be more concentrated, transparent, and split between sophisticated on-chain strategies and institutional off-chain borrowing. The market is moving towards more structured and risk-aware models. As yields rise and prices recover, leverage will likely re-enter the system, but on a stronger foundation tested under extreme conditions. This suggests that crypto’s credit markets are maturing, offering greater confidence to both retail and institutional investors, especially as the regulatory environment continues to improve.

Source: Crypto Leverage Shocker: $61B Risks EXPOSED [Full Report] (YouTube)