Liquidity Crunch Grips Crypto Market as Record Leverage Leads to Sharp Downturn

Total crypto loans surged 35% in Q3 2025, reaching a record $73.6B, driving market volatility.

Liquidity stress linked to TGA buildup and QT has tightened reserves below the $3T level.

Government reopening and Treasury spending expected to restore liquidity, boosting high-beta assets like Bitcoin.

The crypto market is undergoing intense pressure as leverage levels reach historic highs and liquidity tightens across global markets. According to The Kobeissi Letter, total crypto loans surged by 35% in the third quarter of 2025, climbing to a record $73.6 billion

This figure surpasses the previous peak of $69.4 billion set in late 2021. Since early 2024, when U.S. spot Bitcoin ETFs gained approval, lending activity in the crypto sector has nearly tripled. However, the rapid rise in leverage has accelerated liquidations, triggering steep market swings and widespread volatility across digital assets.

Liquidity Tightening Leads to Market Pressure

Analysts attribute the ongoing sell-off to tightening monetary conditions and declining liquidity in the U.S. financial system. Macro commentator plur daddy noted that the contraction of liquidity is flowing through risk markets, first visible in Bitcoin and now affecting broader equity indices

He described a major rotation in investor behavior, where speculative sectors such as quantum computing, nuclear energy, drones and alternative energy are witnessing heavy losses. Meanwhile, capital is concentrating in large-cap technology firms, especially those benefiting from artificial intelligence investments.

The analyst linked the liquidity strain to the buildup of cash in the U.S. Treasury General Account (TGA) and continued balance-sheet reduction under quantitative tightening (QT). The Treasury’s cash balance has exceeded its $850 billion cap due to increased issuance, delayed spending, and the ongoing government shutdown

This has reduced available bank reserves, now falling below the critical $3 trillion threshold. He emphasized that corrective measures to stabilize market liquidity may take time to materialize.

Dollar Strength and Policy Timing Key

With the U.S. Dollar Index (DXY) nearing a key level at 101, analysts are monitoring for signs of a potential reversal. The same analyst indicated that a government reopening would serve as a catalyst for liquidity recovery, followed by a planned QT unwind on December 1 and potential Federal Reserve actions on December 10. He expects a significant fiscal expansion starting January 2026 as the OBBBA legislation takes full effect.

Macro Outlook on Treasury Spending and Fed Policy

Macro strategist Raoul Pal reinforced the liquidity narrative, stating that global markets are dominated by the challenge of rolling $10 trillion in debt. He explained that the U.S. government shutdown has intensified liquidity shortages as funds accumulate in the TGA with limited spending capacity

Once federal operations resume, he projects that the Treasury will inject between $250 billion and $350 billion into the economy within months, easing liquidity pressures. Pal added that potential adjustments to Supplementary Leverage Ratio (SLR) rules could expand bank lending capacity

He also cited expected progress on crypto regulation through the CLARITY Act, alongside fiscal measures designed to stimulate growth ahead of the 2026 midterms. He concluded that when liquidity returns, assets with high beta, such as Bitcoin and other cryptocurrencies, tend to lead market recoveries.

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