We entered the final quarter of the year from a position of apparent strength. Policy conditions had improved, institutional participation was broadening, and the summer rally had restored confidence across risk assets. Digital assets, supported by steady exchange-traded fund (ETF) inflows and growing corporate treasury demand, appeared well positioned to carry that momentum into year-end.
Q4 instead became a quarter defined by adjustment, after a sharp deleveraging early in October exposed structural fragilities beneath elevated positioning and forced a repricing of risk that shaped the remainder of the year.
Risk assets entered October with equities near all-time highs, supported by resilient earnings in U.S. mega-cap technology and growing confidence that monetary policy had shifted decisively toward accommodation. In crypto, that optimism was reinforced by months of steady ETF inflows, corporate treasury accumulation, and a broad summer rally that left leverage and open interest near cycle highs.
Beneath the surface, however, market conditions were unusually distorted. A U.S. government shutdown that began at the start of October removed the usual macro data anchors, forcing participants to trade on partial indicators, corporate commentary, and fragmented signals. In this information vacuum, markets became acutely narrative-driven and headline-sensitive. Crypto, trading continuously while U.S. markets were closed, became the path of least resistance for repricing macro risk, even as positioning remained crowded and liquidity increasingly brittle.
That fragility was exposed on October 10, when a surprise statement from President Trump signalling a 100% tariff on Chinese imports absent “full compliance” hit markets after U.S. equities had closed. While the tone was not unprecedented, the timing proved critical: the initial repricing was forced almost entirely into crypto markets. At the same time, participants were digesting the outcome of a same-day MSCI consultation that raised the risk of digital asset treasury (DAT) vehicles being excluded from major equity indices, introducing the prospect of forced divestment by index-tracking funds
What began as routine de-risking quickly turned mechanical, as falling prices breached margin thresholds across leveraged positions, triggering automatic liquidations––akin to margin calls––executed as market orders. These liquidations consumed available bids and set off a self-reinforcing cascade, amplified by thin order books, shared collateral frameworks, and cross-venue margin linkages.
Approximately $19 billion of leveraged positions were forcibly unwound, making this the largest liquidation event in crypto’s history. This exceeded even the most severe episodes of the 2022 deleveraging cycle around the FTX collapse in both notional size and cross-asset breadth. Bitcoin fell roughly 14% intraday, Ethereum declined more than 12%, and the impact on altcoins was markedly more severe. In thin order books, many smaller tokens experienced drawdowns of 30–50%, with brief episodes where prices collapsed toward zero on individual exchanges as bids disappeared entirely.
The speed and severity of the cascade reflected a breakdown in market plumbing rather than a reassessment of long-term valuations. Several widely used collateral assets—including yield-bearing derivatives of ETH and SOL and Ethena’s USDe—experienced sharp, venue-specific price dislocations driven by liquidity constraints rather than fundamental impairment. Because these assets were widely posted as cross-margin collateral, their markdowns triggered additional margin calls across otherwise unrelated positions, accelerating the liquidation loop. As exchanges adjusted risk parameters and liquidated positions simultaneously, liquidity providers and market makers temporarily withdrew or reduced quoting, which amplified the process.
While the market staged a tentative, broad-based recovery in the following days and weeks, its structure had changed. The scale of the losses forced a meaningful portion of market-making firms to materially scale back or cease operations altogether. Those that remained responded defensively, widening spreads, reducing size, and concentrating activity in the most liquid instruments. Liquidity, which had appeared broad during the summer, became sharply concentrated around majors, leaving the rest of the market structurally impaired.
This shift was felt most acutely in the altcoin complex, where only a narrow set of blue-chip assets with clear fundamentals or revenue linkages managed partial recoveries, but the vast majority of tokens failed to attract any sustained bid. “High-beta” assets that had led earlier phases of the cycle did not resume leadership and most remained pinned near post-crash lows for the remainder of the quarter.
Late October brought a more supportive macro backdrop as strong Q3 earnings from U.S. mega-cap technology firms and a second consecutive Federal Reserve rate cut buoyed equities and briefly improved broader risk sentiment, but crypto participated only marginally. With leverage reset, liquidity fragmented, and market makers cautious, upside moves faded as quickly as they came.
The damage inflicted in October did not resolve with the initial rebound. Instead, it carried into November in quieter but more persistent form, as markets discovered that the removal of leverage had also reduced their capacity to absorb supply. Positioning was cleaner, but liquidity and intermediation were diminished, leaving a bid that had become acutely price-sensitive.
This fragility surfaced rapidly through flows. After acting as a stabilising force throughout the summer, spot crypto ETFs reversed sharply, turning from incremental demand into sustained supply within the first weeks of November. Over the month, Bitcoin ETFs recorded approximately $3.4 billion in net outflows, while Ethereum products saw a further $1.4 billion withdrawn—the largest combined redemption cycle since their launch. On several occasions, daily redemptions overwhelmed organic spot demand, including one late-November session approaching $900 million in Bitcoin ETF outflows alone.
The pressure was further compounded by the presence of a large, systematic seller whose mechanically executed batches dominated intraday flows throughout much of the month. While the underlying motivation remains unconfirmed, on-chain and exchange flow analysis points to several billion dollars’ worth of BTC being distributed over November. Notably, this supply emerged alongside continued balance-sheet accumulation by Strategy, which added meaningfully to its BTC holdings during the period and partially offset the flow. Even so, in a market with impaired liquidity following October’s deleveraging, net supply acted as a persistent overhang.
Price action across the complex reflected this imbalance. Bitcoin slipped through successive support levels at $110k, $105k and later $100k as bids retreated, with the rest of the market trailing as its beta. The altcoin universe, already at depressed levels after October’s collapse, remained largely inert. Most assets continued to trade 30% or more below pre-October levels, and recoveries were brief, selective, and highly rotational. Capital moved tactically between isolated pockets of relative strength, not as an expression of renewed risk appetite, but in search of liquidity where committing size carried increasing cost.
Altcoin performance in Q4 remained constrained after October’s deleveraging (Source: CoinGecko)
All of this unfolded amid unusually limited macro visibility as the U.S. government shutdown dragged on through much of the month, leaving participants to infer policy expectations from scattered Fed commentary—often reflecting a divided committee—and outdated data releases. Equities, supported by a more durable bid and AI-driven optimism, absorbed this uncertainty with relative ease, whereas crypto participated only fleetingly during broader market rebounds toward the end of the month. As November progressed, this divergence became increasingly pronounced, keeping risk-taking contained and reinforcing the view that crypto was bearing a disproportionate share of tightening financial conditions.
By mid-November, liquidity constraints had become the dominant driver of market behaviour. With leverage reset and market-making intermediation impaired, price action increasingly reflected flows, funding conditions, and balance-sheet availability, while narratives that had mobilised capital in the preceding quarter temporarily lost their effectiveness.
These constraints extended well beyond crypto-specific mechanics. In the U.S., dollar liquidity tightened materially into year-end, particularly in short-term funding markets. Daily usage of the Federal Reserve’s Standing Repo Facility rose steadily through the quarter, ultimately reaching record levels above $70 billion in December, which signalled that large financial institutions were increasingly dependent on the Fed for short-term funding rather than providing liquidity to markets themselves. At the same time, the Treasury’s General Account (TGA) expanded toward $1 trillion in November, swollen by heavy debt issuance and delayed government spending during the shutdown. Cash sitting in the TGA is effectively removed from the financial system, reducing the amount of capital available to absorb risk. Altogether, these two dynamics constrained liquidity across markets and limited their ability to respond flexibly to rotating positioning.
Additionally, on a global level, tighter financing conditions further compounded this pressure. In Japan, the prospect of policy normalisation introduced stress into the yen carry trade—one of the largest sources of global liquidity, with notional exposure exceeding $20 trillion. Through November, markets reacted less to realised tightening than to uncertainty, at a moment when U.S. policy was easing, the dollar had considerably weakened year-to-date, and yen-funded positioning remained crowded. By December, that uncertainty resolved as the 10-year JGB yield broke above 2% for the first time in nearly two decades following the Bank of Japan’s rate increase and guidance toward a gradual exit from ultra-accommodative policy. Even in a controlled outcome, the episode forced markets to brace for reduced cross-border liquidity well before the move was fully absorbed.
Against this backdrop, crypto increasingly traded as the most reflexive expression of global liquidity strain. Unlike equities, which benefit from deeper balance sheets, broader investor bases, and natural stabilisers such as passive inflows, digital assets as an emerging asset class remain comparatively more sensitive to changes in funding conditions and risk appetite at the margin. While equities continued to advance on the back of AI-driven earnings strength, crypto—operating with impaired capacity and persistent supply—was unable to absorb flows with the same resilience. The resulting dislocation in market performance therefore reflected differences in market structure rather than a long-term outlook on valuations.
It was in this environment that familiar narratives around four-year cycle dynamics and the onset of a bear market resurfaced, alongside renewed discussion of longer-dated risks such as quantum computing and Bitcoin’s cryptographic durability. Rather than driving positioning, these frameworks largely emerged as prices declined, reinforcing caution and encouraging a deferral of risk-taking. Increased activity from long-dormant Bitcoin wallets lent additional credibility to this interpretation, giving the appearance of a “distribution phase” simply because timing appeared to align with historical precedent. Yet, this framing obscured the extent to which market structure has evolved. As crypto becomes gradually institutionalised—embedded within global balance sheets, funding markets, and cross-asset risk budgets—price formation is less governed by deterministic cycles and more by liquidity regimes and global credit cycles. In such an environment, narratives tend to follow price and, at times, exacerbate moves already underway, rather than initiate them.
By December, markets had settled into a stable but unresolved equilibrium. Forced selling had largely run its course, yet participation remained thin and year-end balance-sheet constraints capped upside. Even as the Federal Reserve delivered its third 25 basis point rate cut of the cycle on December 10, improved policy conditions translated into stabilization rather than renewed momentum, leaving markets locked in a prolonged range-bound behaviour into year-end.
The defining feature of Q4 was not simply weaker prices but also a widening dislocation between prices and fundamentals, as token valuations––many of which had entered the quarter at historically elevated multiples––compressed materially faster than the underlying activity they represent. In practice, usage across several parts of the crypto economy held up or improved while prices reset.
That divergence was most visible in the price-agnostic segments of the market, where adoption is driven by balance-sheet utility rather than speculative momentum. Compared to Q3, Q4 marked a clear pivot toward tokenised assets and on-chain yield instruments becoming core allocations. Capital increasingly flowed toward products offering real yield, cash-flow exposure, and integration with traditional financial activity, reflecting confidence in crypto’s role as financial infrastructure rather than a purely cyclical trade.
This shift was clearest in real-world assets (RWAs), where total market capitalization brought on-chain increased by approximately $3.0 billion quarter-over-quarter (+19%), despite broad weakness in crypto prices. Importantly, growth was concentrated in economically meaningful segments tied to real cash flows and balance-sheet use cases. Private credit, now one of the largest RWA categories, expanded by roughly $620 million (+41%), reflecting growing demand for on-chain credit exposure and structured yield. Commodities added approximately $1.4 billion (+65%), driven by increased use of tokenized commodities as collateral and settlement instruments, while non-U.S. sovereign debt grew by nearly $300 million (+62%), signalling an important expansion adoption beyond purely U.S.-centric instruments.
By contrast, tokenized U.S. Treasuries—the most mature and lowest-risk segment—grew more modestly at around $355 million (+4%), reinforcing their role as foundational on-chain infrastructure rather than a speculative growth vector. Taken together, these flows point to a broadening of RWA adoption away from purely defensive use cases and toward higher-utility, cash-flow-generating assets integrated into on-chain financial activity.
Market capitalization of real-world assets brought on-chain rose to $19 billion (Source: RWA.xyz)
Decentralised exchanges exhibited a similar dynamic. Although volumes softened from cycle highs, aggregate DEX activity and daily user engagement remained broadly stable through Q4. Activity increasingly concentrated around venues enabling composability across asset types, while perpetual DEXs offering leveraged exposure to both crypto and tokenized real-world assets saw particularly strong engagement.
Euphoria will matter for the next leg higher, but Q4 reinforced that what matters more for long-term, durable growth is price-agnostic adoption. RWAs, on-chain credit, and revenue-generating DeFi infrastructure expanded through volatility, anchoring on-chain activity to real-economy cash flows and institutional balance-sheet demand, which is precisely the type of growth that compounds when conditions normalise.
In retrospect, 2025 was not a year of linear progress, but one of structural preparation for digital assets. Policy, market structure, and regulation advanced unevenly, yet meaningfully. With the Clarity Act widely expected to be signed in the coming quarter, the final legislative pillars for broad institutional participation are set to fall into place, completing a multi-year process that allows a wider set of allocators to engage with digital assets under clearer rules, disclosures, and constraints.
And Q4 ultimately served as a stress test of that emerging structure. Valuations reset abruptly, leverage was cleared, and liquidity was repriced across the market, sparing very little in the process. Yet the manner of the drawdown was instructive: while prices declined broadly, underlying activity did not deteriorate in direct lockstep. Areas of the ecosystem generating recurring revenue, balance-sheet utility, and real economic usage demonstrated greater resilience than segments whose valuations had been driven primarily by momentum, narrative or leverage.
Meanwhile, the start of 2026 has brought tentative relief, but also a reminder that geopolitical risk is now a standing feature of the market landscape. In an increasingly multipolar world, it is never fully off the table and resurfaces whenever it intersects with energy, inflation, or financial liquidity. Even so, markets largely absorbed the recent episode in Venezuela, suggesting that such shocks, while ever-present, are no longer met with automatic or indiscriminate repricing.
At the same time, the macro backdrop remains broadly supportive into 2026. Financial conditions continue to ease across both fiscal and monetary channels, with markets pricing roughly 50 basis points of additional U.S. rate cuts through early Q2, while other major economies, including China, remain accommodative. Importantly, the upcoming transition in Federal Reserve leadership is already influencing expectations. While the formal change comes in Q2 2026, the likely appointment of a more “dovish” chair—aligned with an administration prioritising growth and financial conditions—will begin to shape market assumptions around the future policy path, effectively acting as a “shadow” influence on rate expectations well ahead of the handover. This will be complemented by deferred fiscal measures, including tax relief tied to the One Big Beautiful Bill, expected to materialise in Q1.
That said, risks remain, mainly around whether crypto reclaims the incremental bid from risk allocators relative to equities. But as history reminds us, sentiment follows price, not the other way around. With valuations reset, fundamentals intact, and institutional pathways clearing, it may not take much for engagement to return once price begins to move.