Assessing macro drivers and risks shaping crypto’s next phase.
The end of 2025 marked a distinct departure from the period of grinding consolidation of the third quarter, forcing institutional allocators to ask whether the year-end surge was fleeting window dressing or the foundation of a sustained trend. Two months into 2026, the market has delivered its answer.
The initial surge did not happen in a vacuum, nor did bitcoin simply drift upward on retail speculation. It moved because the cost of money changed. The primary catalyst for the recovery was a tangible shift in Federal Reserve expectations, culminating in borrowing costs reaching their lowest levels since 2022. As yields on risk-free assets compressed, capital began seeking yield elsewhere. Bitcoin acted as a high-beta proxy for this liquidity shift, proving the recovery was structural rather than speculative.
ETF flows and institutional accumulation
The difference between a retail rally and a sustainable trend often lies in volume composition. While November 2025 saw nearly 3.8 billion USD in outflows from major funds, the narrative flipped in December and carried into the new year. Net inflows returned to major spot bitcoin ETFs with funds like BlackRock’s IBIT adding billions in holdings. These flows suggest that institutional desks effectively used the Q3 dips to rebalance portfolios ahead of the new fiscal year.
This accumulation phase coincided with a stabilization in other rate-sensitive assets as tech stocks and real estate investment trusts. Bitcoin moved in lockstep with these sectors. This correlation reinforces the thesis that crypto is currently trading as a macro asset. It reacts to global liquidity conditions rather than isolated industry news. The narrative that bitcoin is a purely uncorrelated hedge has temporarily taken a backseat to its role as a global liquidity sponge.
Global liquidity trends navigating 2026
Following the late-2025 surge, the market’s ability to maintain its higher baseline depends heavily on global M2 supply. As price action consolidates through the first quarter of 2026, the macro backdrop remains favorable for scarce assets, driven not only by Federal Reserve policy but also by global M2 supply reaching record highs. Global M2 supply is reaching record highs, approaching 130 trillion USD, driven largely by credit expansion in China.
When global central banks expand their balance sheets simultaneously, assets with fixed supply schedules typically outperform. This is the core fundamental argument for bitcoin in Q1 2026. The expansion of the monetary base increases the denominator of fiat currency while the numerator of available bitcoin remains mathematically fixed.
Currency debasement plays a role here. The US Dollar Index (DXY) showed weakness in December as yield differentials narrowed. A weaker dollar historically provides a tailwind for commodities and digital assets priced in USD. Traders positioning for 2026 are betting that the dollar will continue its gentle decline as the US yield advantage erodes.
Risks to the bullish thesis
Optimism must be tempered with risk management. The path through the remainder of Q1 is not guaranteed. With early 2026 inflation prints now digested by the market, any signs that price pressures will remain sticky heading into the spring could force the Federal Reserve to revise its dovish guidance.
Markets have priced in perfection regarding a soft landing. Any deviation from this script will cause a sharp repricing of risk assets. Bitcoin would likely suffer an immediate drawdown in this scenario as traders rush back to the safety of the dollar.
Regulatory headlines also remain a wildcard. While the market has grown accustomed to a certain level of scrutiny, any surprise enforcement actions from US regulators could dampen sentiment. The market hates uncertainty more than it hates bad news.
Signals to watch in Q1
Investors assessing the longevity of this trend should ignore the noise and focus on three specific data points. First, watch the US 10-year Treasury yield. If it spikes back above key resistance levels, the liquidity thesis for crypto weakens. Second, monitor spot ETF inflows. Consistent daily inflows indicate sustained demand, while a week of outflows suggests the trade is crowded.
Finally, an interesting area to keep tabs on is funding rates in the derivatives market. If funding rates become excessively positive, it signals that the market is over-leveraged and due for a correction. Moderate funding rates suggest the rally is spot-driven and healthy. The recovery of late 2025 has provided a strong foundation the the opening months of 2026 have tested it. As we approach the end of Q1, the market’s ability to absorb profit-taking without breaking key technical support wil determine if it has the structural strength to mount its next leg up.