Bitcoin Sell-Off Drives Basis Compression, ETF Outflows, and Risk-Off Sentiment
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In this report:
BTC Sell-Off: Basis Compression, ETF Outflows, & Risk-Off Sentiment
Spark.fi Rate Cuts and Spreads Tightening: Adapting to Market Shifts
February On-Chain Borrowing: Declining Demand and Stable Liquidity
Market Update
In February 2025, BTC experienced significant volatility, reaching $101,329 on February 3 before declining to a yearly low of $78,248 on February 28—a 22.7% drop. It later rebounded slightly, closing the month at $84,373, down 17.6%.
Several factors contributed to the bearish sentiment and market correction. Anticipation of Solana’s (SOL) March 1 token unlock, which would release 11.2 million SOL ($2.17 billion), created short-term selling pressure. Additionally, new tariffs on imports from Canada, Mexico, and China were expected to raise production costs, fueling inflation and slowing economic growth.
Throughout February, basis remained compressed, reflecting a broader risk-off sentiment, reduced demand for leverage, and lower cash rates across the market. The CME basis traded below 10% annualized for most of the month, hitting a low of 4.08% on February 24, coinciding with sustained ETF outflows. Selling pressure intensified over multiple sessions, with eight consecutive days of net withdrawals, peaking at $364.8 million on February 20.
Despite regulatory advancements—including the SEC dropping several high-profile lawsuits against major crypto exchanges such as Coinbase and Binance—the macroeconomic environment remained challenging.
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Key Trends...
Spark.fi Rate Cuts and Spreads Tightening: Adapting to Market Shifts
In February 2025, Spark.fi's Sky Governance reduced the Sky Savings Rate (SSR) in succession from 12.5% to 8.75%, and then to 6.0%, in direct response to tightening basis trades. As liquidity deepened and risk premiums declined, the spread between lending and borrowing rates compressed, necessitating rate adjustments to maintain market competitiveness. However, the staggered nature of these reductions created a temporary arbitrage opportunity, as traders were able to capitalize on the higher SSR before subsequent cuts took effect. This dynamic underscores the challenge of reactive rate-setting in DeFi, where yield-sensitive participants move quickly to exploit inefficiencies.
Declining On-Chain Borrowing Costs and Low Supply Rates Reflect Improved Liquidity Conditions
In February, on-chain borrowing rates for USDC ranged from 8.6% to 5.9%, averaging 6.96%. On-chain supply rates hovered around 3-4%, reaching some of their lowest levels in recent months. On-chain rates are a key indicator of leverage demand, as lower borrowing costs often suggest reduced interest in leveraged positions. With supply APY consistently staying in this range, it suggests that lenders have been willing to provide liquidity despite lower returns, possibly due to broader declines in crypto cash yields.
Utilization rates remained steady between 71.9% and 60.0%, with an average of 65.2%, marking one of the lowest levels in the past 12 months. This trend reflects improved liquidity and reduced borrowing demand, likely driven by macroeconomic shifts, lower risk appetite, and normalized speculative trading, fostering a stable market.
Notable News
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