From Sharp Decline to Recovery: Liquidity Transition and Value Center Reconstruction

During November, the cryptocurrency market rapidly declined due to large-scale outflows from ETFs and the clearing of leveraged and high Beta risks, leading to a significant contraction in risk appetite. However, entering December, the Federal Reserve's interest rate cuts, the formal exit from quantitative tightening, and improvements in short-term liquidity conditions pushed the market from a "passive de-risking" phase to a "repair phase under cost and liquidity constraints." The stabilization in prices primarily stems from the formation of support below rather than a recovery in upward momentum.

The current core characteristic of the market lies in the re-confirmation of the value center rather than a directional trend choice. The holding cost of Bitcoin spot ETFs is highly concentrated in the $80,000 to $85,000 range, combined with a dense distribution of on-chain chips and institutional long-term allocation attributes, providing clear support for prices. At the same time, the yield curve remains steep under fiscal supply and term premium constraints, making it difficult for long-term rates to significantly decline, thus suppressing the expansion space for risk asset valuations. Under this "short-end support, long-end constraint" combination, crypto assets exhibit characteristics of range-bound trading with pressure above and support below.

From a configuration perspective, we believe that the current stage is more suitable for prioritizing risk management, maintaining a neutral and slightly defensive risk exposure structure. Bitcoin remains the optimal core asset after risk adjustment, with its ETF cost zone, chip structure, and institutional holding stability forming a key anchor for prices below. In contrast, Ethereum and some mainstream altcoins present structural opportunities, but in the absence of clear liquidity expansion or policy catalysts, they are more suitable for phase-based rotation configurations rather than active accumulation.

Looking ahead to 2026, the core game of crypto assets will still revolve around whether the U.S. economy achieves a soft landing and the evolution of the inflation path. Essentially, this is a judgment on how the Federal Reserve's policy function is re-priced under the "growth-inflation" constraints. Before macro uncertainties are resolved, the market is more likely to consolidate the value center through a time-for-space approach, with a genuine trend relying on clearer liquidity expansion or policy signals.

November Plunge: A Typical Liquidity Withdrawal and Valuation Reconstruction

In November, the entire cryptocurrency market faced significant downward pressure, continuing the downward momentum from October's liquidation levels, with the total market capitalization of cryptocurrencies decreasing by 15.43% in November, ending the month at approximately $2.8 trillion, a sharp decline from $4.2 trillion in October.

Figure 1. Total Market Capitalization of Cryptocurrencies (Source: CoinMarketCap)

As a market barometer, BTC fell by 16.7% to around $87,000, with its market share declining to 58.7%. ETH dropped by 21.3% to below $2,900, with its market share falling to 11.6%. Altcoins performed even worse: Solana, despite ETF inflows, still fell by 28.5%, while other major coins like BNB (-19.6%) and XRP (-14.5%) reflected broader risk aversion sentiment.

Figure 2. Changes in BTC and ETH Market Shares (Source: CoinMarketCap)

Due to the de-pegging of stablecoins and liquidity loss from projects like Balancer being hacked, DeFi's Total Value Locked (TVL) shrank by 16.8% to $130 billion. The market capitalization of stablecoins fell by 0.37%, marking the first decline since 2022 (currently totaling about $287 billion), indicating a slowdown in new capital inflows, tightening overall liquidity, and a decline in investor risk appetite.

Figure 3. Total DeFi TVL (Source: DefiLlama)

The spot BTC ETF experienced its largest monthly outflow since inception, exceeding $3.5 billion, with a weekly peak outflow of nearly $1 billion. In contrast, newly launched altcoin ETFs (SOL, XRP) attracted inflows, but the overall scale of funds was smaller compared to mainstream ETFs like BTC and ETH.

This round of correction was not triggered by a single risk event but was the result of macro liquidity expectations, institutional position adjustments, and the contraction of high Beta asset valuations, reflecting a typical "de-leveraging - de-premium" process.

December Rebound: From Sharp Decline to Oscillating Recovery with Liquidity Support

In December, the market entered a repair phase, rebounding from the bottom to oscillate within a range. As of December 20, BTC approached $88,000, and ETH was around $2,950, while major altcoins like Solana and XRP showed weak rebounds, only hitting bottom in mid-December after continuous new lows, with current trends remaining stable. The fear and greed index rose to 25 (fear), indicating that the market still lacks confidence, and the weak performance of altcoins reflects the gradual deterioration of market liquidity following the large-scale liquidation in October.

Thanks to the gradual return of investors after market stabilization, the supply of stablecoins in December tended to stabilize, with a 30-day growth of about 1.72%, ending the decline of November. On-chain TVL gradually stabilized and slightly rebounded, with net outflows from BTC and ETH ETFs slowing down and recording continuous small inflows, indicating a shift in ETF fund flows from withdrawal to reallocation.

This repair was driven by seasonal factors (December historically often sees year-end rebound effects) and supported by the Federal Reserve's interest rate cuts and inflation data coming in below expectations, further enhancing market risk appetite. This is a process of confirming the value center rather than the beginning of a trend-driven rally.

Macroeconomics: Steepening Yield Curve and Short-Term Liquidity Support

In 2025, the U.S. economy exhibited K-shaped recovery characteristics, with tech giants driving significant profit and market value growth through AI investments, while low-income groups faced wage stagnation and job losses. GDP growth is expected to be 1.9% in 2025 and about 2.0% in 2026. However, signs of cooling in the labor market are evident, with the unemployment rate rising to 4.6% in November, the highest since 2021, and non-farm employment increasing by only 64,000, below expectations, with October revised to -105,000. The labor force participation rate remained at 62.5%, but involuntary part-time employment increased, which somewhat supported the employment population ratio while exposing structural issues of hidden weakness in the labor market.

Recently, the U.S. Treasury yield curve (especially the 2Y/10Y and 3M/10Y term spreads) has continued to steepen, reflecting the market's repricing of future policy paths, fiscal conditions, and economic fundamentals. This steepening is primarily driven by expectations of rate cuts in the front end, but long-term yields are constrained by rising term premiums and fiscal supply pressures, leading to an atypical steepening characteristic of "bullish front end, bearish back end."

Figure 4. Difference Between 10-Year and 2-Year Treasury Yields (Source: FRED)

Key driving factors include:

1. A decline in expectations for rate cuts in 2026-2027—The Fed's dot plot suggests only one additional 25bp cut in 2026;
2. Pressure from massive fiscal deficits—The federal deficit for FY2025 is projected to reach $1.8 trillion, accounting for 5.9% of GDP, with a monthly deficit of $173 billion in November;
3. Structural inflation concerns—Recent inflation data shows a 0.3% month-on-month increase in CPI for November and a year-on-year increase of 2.7%, with core CPI year-on-year around 2.6%. Excluding disruptive factors, inflation remains sticky;

In terms of liquidity, the Federal Reserve ended quantitative tightening on December 1, marking the end of nearly three years of balance sheet contraction. The exit from QT signifies the conclusion of the liquidity tightening cycle. At the same time, the Fed announced it would resume purchasing short-term U.S. Treasury securities starting December 12, with an initial scale of about $40 billion per month, which may gradually adjust to a range of $20-25 billion per month after the 2026 tax season. Officials emphasized that this is a technical reserve management (RMP) measure, not a stimulative QE, aimed at preventing liquidity tightening and maintaining control over short-term rates. Considering the scale, purchase targets, and current fiscal policies, overall short-term liquidity in the market is expected to improve. However, since RMP cannot lower long-term yields, the expansion of risk asset valuations will be limited, creating a "dilemma" where the current market has limited upside potential and temporary support below.

Specifically, from liquidity indicators: As of December 18, the Treasury General Account (TGA) balance was $86.1 billion, down from previous levels, releasing funds into the market; commercial bank reserves were about $2.94 trillion, showing a significant rebound since December, indicating an improvement in interbank dollar liquidity conditions. Key rates such as SOFR-IORB have also retreated from previous highs, indicating a slight easing of the previously tight liquidity situation.

Figure 5. TGA Balance (Source: FRED)

Figure 6. Commercial Bank Reserves (Source: FRED)

Figure 7. SOFR - IORB Spread (Source: MacroMicro)

Bitcoin: Pressure Above, Support Below in Value Reconstruction

Bitcoin sharply fell to around $80,000 in November and repaired to around $88,000 in December, with lows gradually rising but volatility narrowing. The rebound repair is expected to continue, and a wide oscillation range of $80,000 to $94,000 has formed.

In November, BTC ETF saw a net outflow of $3.5 billion, becoming the main trigger for the rapid price decline that month. Entering December, the outflow of BTC ETF funds slowed down, and there were several days of small net inflows. As of December 12, the monthly net inflow exceeded $200 million, marking a shift from passive de-risking to institutional reallocation. The ETH ETF saw a net outflow of $1.4 billion in November and a net inflow of $120 million in December. Although the overall inflow scale is smaller than that of the BTC ETF, this reversal reflects the demand resilience of ETH in this range.

Figure 8. Net Inflows and Outflows of BTC Spot ETF (Source: coinglass)

Figure 9. Net Inflows of ETH Spot ETF (Source: coinglass)

From on-chain data, the current chip structure of BTC shows significant accumulation in the $80,000 to $85,000 price range, which is also the oscillation repair range over the past month, corresponding to a large number of medium and short-term holders and the cost base of institutional ETF inflows. Holders have limited unrealized profits but have not seen large-scale sell-offs, indicating strong support at this level. If the price effectively stabilizes above this range, it can be seen as a signal of restored bullish confidence, further challenging the resistance levels of $90,000 to $95,000.

Figure 10. Distribution of BTC Chip Structure (Source: glassnode)

The on-chain data for ETH also shows a similar chip structure, with significant accumulation in the $2,800 to $3,100 price range. Above $3,500, some trapped chips create upward pressure, and the massive accumulation of chips on both sides makes it difficult for prices to show a clear trend without sufficient triggering factors in the short term.

Figure 11. Distribution of ETH Chip Structure (Source: glassnode)

Conclusion and Outlook

Considering the macro environment, liquidity changes, and the internal structure of crypto assets, we expect that the current market has completed the systematic digestion of the November plunge and has entered a phase of oscillating repair centered on confirming the value center. In the short term, crypto assets lack catalysts for driving trend breakthroughs, overall presenting a characteristic of "pressure above, support below" in a wide range.

Regarding configuration and operations, we currently maintain a neutral and slightly defensive risk exposure management recommendation, focusing on core assets while waiting for clearer liquidity expansion or policy signals before gradually increasing risk exposure. Bitcoin remains the optimal asset after risk adjustment, with its ETF cost zone ($80,000 to $85,000), dense on-chain chip area, and institutional holding stability collectively forming the core support below prices. The expected short-term main operating range for BTC is $80,000 to $95,000, with limited sustainability in breaking through the upper range before significant liquidity expansion or rapid declines in interest rates occur.

Looking ahead to 2026, the core game of crypto assets will still revolve around whether the U.S. economy achieves a soft landing and the evolution of the inflation path, fundamentally concerning how the Federal Reserve's policy function is re-priced under "growth-inflation" constraints. We believe that in the coming year, there are mainly several types of scenario differentiation:

• The first scenario is a hard landing: If employment and demand weaken rapidly, and inflation falls simultaneously, the economy will enter a clear downturn phase, and risk assets will face typical risk-off shocks in the short term, with the crypto market unlikely to remain insulated. However, historical experience shows that once a recession is confirmed and policies shift significantly dovish, the repair of the liquidity environment often brings a second-stage repricing opportunity for risk assets, and crypto assets may experience structural rebirth after an initial decline.
• The second scenario is a soft landing but with sticky inflation: If economic growth remains resilient while the pace of inflation decline is limited, the Fed's room for rate cuts will be constrained, leading to a longer observation and maintenance phase for policies. In this context, real interest rates and financial conditions are unlikely to loosen significantly, limiting the expansion of risk asset valuations. The crypto market is more likely to exhibit characteristics of oscillating around a predetermined value center, with the overall trend leaning towards "time for space," where structural and relative return opportunities will significantly outnumber trend-driven movements.
• The third scenario is a soft landing but with inflation re-accelerating: If signs of inflation re-acceleration emerge, accompanied by rising inflation expectations or significant loosening of financial conditions, the Fed may end the rate-cutting cycle early or even reassess its tightening stance. In this scenario, the "higher for longer" interest rate expectations will continuously suppress high Beta risk assets, leading to increased valuation pressure on the crypto market.
• The fourth scenario is a soft landing with continued inflation decline: If economic growth is moderate, employment remains stable, and the downward trend in inflation is confirmed, the Fed's policy space will further open up, and a decline in real interest rates is expected to improve the overall liquidity environment. This combination is most favorable for risk assets, providing better conditions for valuation repair and upward trends for crypto assets.

In summary, we believe that the market in early 2026 is more likely to operate in a liquidity environment characterized by "support rather than expansion," with switches between different scenarios highly dependent on marginal changes in employment, inflation, and overall financial conditions. Before macro uncertainties are resolved, crypto assets may still primarily exhibit oscillating behavior and structural opportunities, with genuine trend choices relying on clearer policy and liquidity signals. Within the framework of the above multiple scenarios, we are more inclined to maintain a configuration approach focused on core assets and controlling tail risks in early 2026, gradually adjusting risk exposure based on macro triggering signals.