Entering 2026, the crypto market is in a rather unusual state. Positive macro news is not lacking, trends and narratives continue to circulate, ETFs are already live, and institutional adoption is becoming increasingly visible. Yet prices have failed to break out as many expected. This has split the community into two opposing camps.
- One camp, following the traditional four-year cycle, believes the market has already entered a downtrend and that most recent rebounds are merely bull traps.
- The other camp argues that ETFs have fundamentally changed capital flow dynamics, the four-year cycle is no longer valid, and crypto is simply consolidating ahead of a new upward phase.
So which interpretation is closer to reality? Have we truly entered a downtrend in line with the four-year cycle, or has that framework been structurally broken?
1. Why Is the Crypto Market Weak Despite Bullish Long-Term Factors?
At the moment, many investors feel confused. ETFs are live, crypto adoption continues to expand, US equity markets keep making new highs, assets like gold and silver are also performing strongly, and institutional capital is becoming more visible. Yet crypto prices have not responded proportionally. The core issue does not lie with crypto itself, but with the macro liquidity environment moving against market expectations.
In the second half of 2025, much of the market was positioned for an optimistic scenario. Investors expected the Federal Reserve to pivot, rates to fall, quantitative tightening to end, and the US dollar to weaken, allowing liquidity to return and crypto to trend higher. What actually happened was very different. The financial system experienced a short-term drain of US dollars, making monetary conditions tighter in practice, even if policy rhetoric appeared less restrictive.
One of the clearest signals came from the repo market, where financial institutions borrow short-term USD to manage balance sheets. Toward the end of 2025, repo rates surged from around 3.1 percent to roughly 4.2 percent, while the policy rate stood near 3.75 percent. A repo rate trading 45 to 55 basis points above the Fed rate indicates short-term USD scarcity in the system.
When repo conditions tighten, banks and institutions are forced to :
- Hold higher cash balances
- Reduce exposure to risk assets
- Scale back capital deployment across markets
At the same time, fiscal factors added further pressure. Data from FRED shows that the US Treasury General Account balance at the Fed rose sharply in the second half of 2025. By year end, the TGA stood at approximately 837 billion USD, an increase of more than 500 billion USD compared to mid-year.
To rebuild the TGA, the US government issued additional Treasury bonds, and the funds used to purchase those bonds were withdrawn directly from the banking system. This reduced circulating liquidity, even though the Fed had already halted quantitative tightening.
In this environment, Bitcoin typically reacts earlier than other assets. Historically, Bitcoin prices have shown a strong relationship with USD liquidity, often more clearly than with interest rates alone. As a high-volatility asset, Bitcoin and the broader crypto market tend to decline before traditional markets weaken, and they also recover earlier when liquidity returns. As a result, current sideways or weak price action does not imply that the long-term thesis is wrong, but rather that liquidity conditions have not yet allowed prices to break out.
2. Does Bitcoin Still Depend on USD Liquidity?
Liquidity remains the most important variable influencing Bitcoin, but the market is misjudging two key factors: timing and magnitude. Many investors are correct about the long-term direction, but they expect price reactions to occur too early, while the financial system always operates with a lag.
A key insight often highlighted is the two to three month lag between major liquidity inflection points and Bitcoin’s price response. If US liquidity data indicates a true bottom around mid-November 2025, then a more reasonable window to observe Bitcoin’s reaction would be February 2026, not immediately afterward. This helps explain why the crypto market remains subdued despite early signs of policy easing.
This timing issue underpins the divide between two major macro perspectives:
- One view, often associated with Raoul Pal, argues that the end of quantitative tightening, fiscal flows, potential adjustments to eSLR, and a weakening USD are already sufficient to support risk assets, even without formal quantitative easing. From this perspective, the market is underestimating the impact of subtle liquidity injections already taking place.
- The more cautious camp, represented by analysts such as Michael Howell, contends that these factors are not strong enough to drive a sustained bull cycle. As long as the repo market remains tight, bank reserves stay thin, and US government refinancing pressures persist, the system still lacks a true liquidity impulse. Under this framework, Bitcoin and risk assets can only enter a clear uptrend once genuine QE or aggressive intervention emerges, typically in response to systemic stress.
Importantly, neither side disputes the role of liquidity. The disagreement lies in whether current conditions are sufficient to trigger a new cycle. This is why there is no absolute answer. Instead, the market is in a phase that tests whether liquidity is adequate, where patience with time is just as important as understanding the investment thesis for the year.
3. What Should Crypto Investors Do Next?
Recent discussions within the crypto community reveal a broad consensus. Liquidity is more likely to return in stages throughout 2026 rather than through an immediate surge. Most views point toward Q1 to Q2 2026 as the period when macro and regulatory factors may begin to align more clearly. This suggests that the current phase is not about maximizing risk, but about preparing positions and refining strategy.
From a long-term perspective, the macro backdrop remains relatively clear. Governments, especially the United States, face persistent budget deficits, rapidly rising public debt, and increasing pressure from maturing Treasury obligations. By 2025, annual interest expenses had already approached 1 trillion USD, and under scenarios without structural reform, total debt could rise to as much as 150 trillion USD by 2055.
In such an environment, the financial system will almost inevitably need to expand liquidity to maintain stability. This supports assets with limited supply and low dependence on fiat currency. Bitcoin therefore continues to be viewed as a long-term reflection of currency debasement, and structurally, the long-term investment thesis for BTC remains intact.
In the short term, however, this is not a phase for blind risk-taking. Structural constraints persist, including instability in short-term funding markets, the risk of reversals in yen-funded carry trades, and fragile capital flows into AI and technology. Meanwhile, economic policy remains focused on stabilizing living conditions and controlling inflation rather than supporting asset prices.
According to Julio Moreno from CryptoQuant, several core indicators have turned bearish since November 2025, including market demand, investor profitability, and most importantly liquidity. Bitcoin trading below its one-year moving average suggests that macro and liquidity pressures are influencing price structure rather than short-term volatility alone.
At a broader macro level, the combination of protectionist trade policies, persistent inflation, interest rates remaining higher than expected, and the risk of slowing global growth continues to weigh on risk appetite. Crypto increasingly behaves like a risk asset, making it more sensitive to macro shocks. In 2025, when liquidity tightened and defensive sentiment dominated, crypto did not act as a safe haven and was often sold alongside equities and other risk assets.
Even if liquidity gradually improves in 2026, many analysts believe capital will return in layers, starting with more defensive assets before flowing into higher beta segments. CryptoQuant also suggests that the current corrective cycle may be deep but less systemically destructive than previous ones. However, that does not imply a fast or linear recovery.
For semi-professional investors, a rational strategy for 2026 is not to attempt to catch the bottom or chase short-term rebounds, but instead to maintain a positive long-term outlook while remaining patient in the short term, prioritize risk management while liquidity remains fragmented, and wait for confirmation signals rather than expecting quick returns.
When large-scale capital has not fully returned, managing risk and waiting for confirmation matters more than chasing fast profits.
4. Conclusion
Ultimately, the question of whether 2026 marks the start of a new cycle or the end of a relief rally is not determined by narratives or ETFs, but by USD liquidity and the lag inherent in the financial system. Crypto retains a bullish long-term thesis, but in the short term it remains governed by monetary conditions, repo market stress, and fiscal flows.
The current market resembles a phase that tests whether liquidity is sufficient, rather than a definitive downtrend or a clear bull market. Investors should prioritize risk management, remain patient with signals, and only increase exposure once liquidity conditions genuinely align.
Disclaimer: This content does not constitute investment, tax, legal, financial, or accounting advice. MEXC provides this information for educational purposes only. Always do your own research, understand the risks, and invest responsibly.