Crypto Market Reset: ETFs Cool, Leverage Unwinds, Liquidity Shallow

Recent data compiled by CoinMetrics reveals a significant weakening in major cryptocurrency absorption channels. Spot Bitcoin ETFs have experienced multi-week net outflows totaling $4.9 billion since mid-October, marking the largest redemption cycle since April 2025. This substantial withdrawal of institutional capital has created persistent downward pressure on prices and reflects shifting investor sentiment toward digital assets.

The cooling demand extends to Digital Asset Trusts (DATs), which are facing cost-basis pressure that compresses their premiums to NAV. This compression limits their ability to raise capital or increase crypto holdings per share. Michael Saylor-led MicroStrategy, the largest DAT holding 649,870 BTC at an average cost of $74,333, has notably slowed its accumulation strategy as its equity valuation softened. This pattern mirrors a broader cooling across corporate treasuries that had previously been aggressive accumulators of Bitcoin.

The cryptocurrency derivatives market has undergone a dramatic leverage reset following the October 10th liquidation cascade, which erased over 30% of perpetual futures open interest in mere hours. This violent deleveraging pushed open interest well below pre-crash highs and fundamentally altered market dynamics. Funding rates have subsequently drifted toward neutral or slightly negative levels, indicating a more balanced market with reduced speculative positioning.

DeFi lending markets have experienced a parallel unwind, with active loans on Aave V3 declining significantly since late September. The most pronounced contraction occurred in stablecoin borrowing, which plummeted 65% after Ethena’s USDe depegging event rattled confidence in algorithmic stablecoins. ETH-based borrowing, including WETH and Liquid Staking Tokens (LSTs), declined by 35-40% as reduced looping activity and diminished leverage appetite swept through the DeFi ecosystem.

Spot liquidity has failed to recover from the October market turmoil, with top-of-book depth for major cryptocurrencies BTC, ETH, and SOL remaining 30-40% below early-October levels. This persistent liquidity deficit has kept markets fragile and vulnerable to outsized price moves from relatively modest order flow. The situation is even more pronounced in altcoins, where liquidity conditions remain substantially weaker, reflecting persistent risk aversion and reduced market-making activity.

The shallow liquidity environment compounds the challenges created by the leverage unwind and ETF outflows, creating a feedback loop where thin order books amplify price movements in both directions. This structural vulnerability has made the market particularly sensitive to macroeconomic developments and shifts in risk sentiment, with even modest selling pressure capable of triggering disproportionate price declines.

This internal market reset is occurring against an unfavorable macroeconomic backdrop characterized by uncertainty around rate-cut expectations, weakness in technology equities, and a broader risk-off tone that has tempered appetite for digital assets. Bitcoin’s recent divergence from gold—which is up over 50% year-to-date—and the loss of momentum in AI-driven tech stocks highlight how changing macro conditions have influenced cryptocurrency sentiment.

Despite the near-term pressures, the current recalibration is leaving the cryptocurrency market in a healthier state with reduced systemic vulnerabilities. The cleansing of excessive leverage and normalization of positioning creates a more stable foundation for future growth. A sustained recovery would require renewed strength in major demand channels such as ETF inflows, resumed DAT accumulation, stablecoin supply expansion, and a rebound in spot liquidity. Until these elements improve, markets will continue navigating the tension between an unfriendly macro regime and a crypto market structure that, while internally healthier, awaits stronger demand to return.