Sentiment, liquidity and structural demand reshape the bitcoin market in a deep but different drawdown

As investors reassess risk across digital assets, the bitcoin market is navigating a deep drawdown even as structural participation and on-chain liquidity remain notably resilient.

Macro headwinds and the current market reset

Crypto markets remain in a sustained de-risking phase, shaped by macro headwinds, a holding Federal Reserve, fiscal uncertainty, and AI-driven capital rotation that has pushed BTC to a roughly 52% decline from its October 2025 all-time high. However, the key question is gradually shifting from how far prices can fall to when fresh demand returns.

Two dominant forces are steering this adjustment. The first is a rotation of attention and capital away from crypto and toward AI and other defensive narratives in equities and commodities. The second is policy: expectations of continued hawkish Fed positioning, the risk of another partial U.S. government shutdown, and persistent geopolitical and trade tensions have left the environment unreceptive to aggressive risk-taking.

With BTC touching lows near US$60K on February 5 before bouncing, it is increasingly useful to compare this cycle’s pullback with earlier ones. From the October 2025 peak, the decline now sits around 50%. Historically, corrections of this magnitude have occurred several times within broader bull cycles. That said, today’s market structure is more institutional, and liquidity channels, from centralized venues to on-chain rails, are significantly deeper.

Moreover, as Bitcoin consolidates, altcoins continue to lag badly. Their underperformance has been more severe than in prior cycles, reflecting a distinct rotation toward durability and away from speculative beta. Capital is concentrating in the largest assets by market value, which, while painful for smaller tokens, typically precedes the construction of more robust long-term foundations.

Supply expansion, token fatigue and long-tail dynamics

Token supply growth has compounded the damage. Roughly 11.6M out of the 20.2M tokens launched in 2025 are no longer actively traded. Many of these assets came to market without users, revenue, or defensible differentiation, leaving price discovery almost entirely driven by hype. Unsurprisingly, most now trade well below initial valuations, with liquidity having dried up.

The sheer volume of issuance fragmented investor attention across an increasingly crowded landscape. As a result, user fatigue set in faster, and projects with genuine fundamentals were forced to compete with a constant pipeline of short-lived launches. However, parts of the long tail have recently shown smaller percentage moves than major assets, suggesting much of the deleveraging and repricing occurred earlier in the cycle, leaving reduced marginal supply in the current phase.

Rather than signaling a renewed appetite for high-risk bets, this pattern likely points to gradually exhausted selling pressure. Moreover, recent weakness is not just a crypto-specific story. Equity markets have repriced risk as well, particularly within the software sector, following the rapid acceleration of the AI disruption narrative and its implications for margins and business models.

The distinction for digital assets is important. Equities have often sold off on fears of direct disruption to specific workflows, whereas in crypto the primary impact from AI is more about attention and sentiment. In past cycles, investors grew accustomed to altcoins dramatically outperforming while equities and commodities lagged. This time, AI-focused stocks, emerging markets, precious metals, and in some cases traditional commodities have outperformed BTC, creating a notable attention and liquidity divide.

That said, the AI disruption narrative also highlights an opportunity. The same agentic AI systems driving divergence in technology stocks are among the most compelling emerging users of on-chain payment rails and stablecoin infrastructure. AI agents transacting at machine speed across borders will require programmable, permissionless money, suggesting the medium-term use case is real even if the near-term allocation dynamic weighs on token prices.

Macro still sets the tone for crypto

Macro conditions continue to be the primary driver of crypto market direction, arguably more than at any other point in recent years. This week’s data was dominated by the January U.S. jobs report and its implications for the Federal Reserve’s reaction function.

January nonfarm payrolls came in ahead of expectations at 130,000, while the unemployment rate fell to 4.3%. On the surface this appears constructive, yet benchmark revisions painted a weaker backdrop. Annual adjustments showed only 181,000 total jobs were created in all of 2025, or roughly 15,000 per month, versus the 584,000 initially reported.

That makes 2025 the worst year for net job creation since 2020, or since 2003 when excluding recessions. In that context, January’s print looks more like stabilization in a fragile labour market than the start of a robust recovery. However, this nuance is what matters for markets: a solid jobs number in a truly strong economy would give the Fed room to ease policy, while a strong print in a cooling environment instead encourages policymakers to hold rates steady.

That is precisely the signal markets received. Rate cuts are not imminent, and with Kevin Warsh nominated as the incoming Fed Chair, uncertainty around the medium-term liquidity trajectory has increased. BTC has historically been the single most sensitive major asset to shifts in global liquidity conditions, even more than equities or gold. In a world where liquidity is being constrained, that sensitivity is a clear headwind.

The same dynamic, however, will become a tailwind once expectations shift toward easing. When liquidity improves, price moves in Bitcoin can be amplified on the upside as quickly as they have been on the downside. This asymmetry underpins why liquidity watchers remain focused on every incremental signal from the Fed and broader funding markets.

Where the structural case remains intact

Despite the current drawdown and headline noise, the structural tailwinds for crypto have not disappeared. In fact, this period resembles prior corrections where the product and fundamentals layer continues to quietly compound while speculative attention retreats. That is usually when the foundation for the next phase is built.

One of the clearest examples sits in spot BTC ETFs. Despite a roughly 50% price decline from the all-time high, aggregate ETF assets under management have only modestly retraced. This divergence suggests positioning is closer to long-term strategic allocation than short-term momentum capital, with the investor base appearing comparatively sticky.

There have even been windows of net inflows across several days, indicating genuine opportunistic accumulation rather than forced selling. Moreover, this resilience matters even more because another key flow channel this cycle, digital asset treasuries (DATs), has softened. DAT buyers are contributing less incremental demand, as prices sit below many acquisition levels and equity premiums have compressed, making balance-sheet expansion difficult to justify.

These entities are behaving more like holders than incremental accumulators. Meanwhile, stablecoin supply has remained near cycle highs. Unlike during prior downturns, capital has not aggressively exited the on-chain dollar system. Liquidity is present; it simply appears to be waiting for clearer catalysts.

Real-world assets and tokenization momentum

Real-world assets, or RWAs, continue to stand out in a risk-off environment, with capital preservation emerging as the dominant theme. The on-chain RWA market is approaching US$25B, led by tokenized treasuries, commodities, and yield-oriented structures that attract capital seeking stability, transparency, and programmable settlement. Adoption is accelerating across institutions that are actively testing tokenization pathways.

Tokenized commodities have expanded notably, rising more than 50% since the start of 2026. Tokenized gold has emerged as a key defensive building block in DeFi. With spot gold trading above US$5K per ounce, demand has created a powerful new source of inflows into on-chain products.

Tether Gold (XAUT) illustrates this trend, with market capitalization now above US$2.6B and supply exceeding 712K tokenized ounces. If elevated volumes persist beyond purely risk-off windows, a structural flywheel can form: deeper liquidity tightens spreads, improves routing efficiency, and enhances gold’s viability as DeFi collateral, with spillover benefits for other assets.

More broadly, the RWA thesis is unfolding largely as expected. Tokenized U.S. Treasuries account for around US$10.7B in on-chain value. Private credit, tokenized equities, and yield vaults continue to attract fresh allocations, while emerging markets show proportionally higher inflows and relative performance. That said, what stands out is the genuinely global nature of the opportunity, with participants ranging from fintechs to traditional asset managers.

Against this backdrop, the bitcoin market is increasingly intersecting with these tokenized cash flow streams as investors look to balance cyclical volatility with exposure to real-yield on-chain instruments and high-conviction infrastructure assets.

DeFi convergence and BlackRock’s tokenized fund move

Against the weak price backdrop, the week’s most significant development for decentralized finance came from BlackRock. Working with tokenization platform Securitize, the firm will make shares of its tokenized U.S. Treasury fund BUIDL tradable via UniswapX, the institutional order routing and settlement layer of the Uniswap ecosystem.

The importance of this decision is hard to overstate. BlackRock has been methodical in every step of its digital asset engagement, from launching spot BTC ETFs to BUIDL‘s initial on-chain issuance. Selecting a DeFi protocol for settlement signals growing confidence in the maturity and reliability of decentralized infrastructure, and it outlines a repeatable blueprint: regulated entry, compliant access controls, atomic settlement, and continuous market availability.

This structure is precisely what is required for equities, credit products, commodities, and ETFs to scale on-chain. Moreover, the subsequent purchase of Uniswap’s governance tokens adds another layer of relevance. The world’s largest asset manager has now taken economic exposure to a live DeFi protocol, not just its tokenized assets.

The reaction in the UNI token is instructive, not solely because of the 20–30% price move but because it demonstrates that liquidity is available and can mobilize rapidly when credible catalysts emerge. The market is not fundamentally impaired; it is cautious and patient. This episode reinforces the idea that tokens backed by real utility and protocol revenue are waiting for demand catalysts to drive repricing.

More broadly, the move marks tangible progress in the convergence between DeFi infrastructure and traditional finance and offers a template for what could follow across other verticals. Institutional participation is emerging in a market already producing measurable cash flows. Uniswap is one example, but not an outlier: borrowing, trading, and liquidity provision protocols across DeFi are supporting meaningful levels of usage and revenue generation.

Even so, performance dispersion remains visible beneath the surface. Sectors tied to clear utility and institutional engagement, such as RWAs and core DeFi infrastructure, have generally held up better on a relative basis. However, price action across the entire complex continues to be shaped primarily by macro and sentiment forces rather than idiosyncratic fundamentals.

Looking ahead: levels, catalysts and sentiment shifts

Market participants are likely entering a phase of elevated volatility as they search for clearer signals from both macro data and on-chain flows. Bitcoin’s realized price, a proxy for the aggregate cost basis across holders, currently sits around US$55,000. When spot price converges toward this level, a large share of holders move close to or below breakeven.

This tends to amplify psychological pressure, but it also magnifies the eventual significance of holding or losing that threshold. Stepping back, the broader backdrop differs meaningfully from earlier cycles. Markets are enduring a roughly 50% drawdown and a multi-trillion reduction in aggregate value, yet structural participation is deeper than ever before.

Stablecoin rails are firmly established, RWAs and tokenization are scaling, prediction markets are advancing, and global institutions are openly disclosing digital asset holdings or settling products on blockchain infrastructure. Moreover, the macro and structural environment is not a simple replay of 2018 or 2022. The drawdown is real, yet the context surrounding it has changed substantially.

Across both crypto and traditional markets, history shows a recurring pattern. When prices compress while fundamentals continue to improve, conviction builds beneath the surface and the product layer strengthens. Once risk reprices, assets that compounded through the reset typically lead the next leg.

For now, liquidity remains present but selective, waiting for clearer catalysts. In the coming week, attention will turn to the release of the FOMC minutes and U.S. core PCE inflation. The minutes should provide greater insight into how policymakers assessed recent conditions, while the inflation data will update the near-term macro backdrop that investors must navigate.

At the same time, events such as ETHDenver will offer a real-time view of builder activity, capital formation, and ecosystem momentum at a moment when public market pricing has turned cautious. Taken together, these signals will help determine when sentiment begins to shift from defense back toward measured risk-taking across digital assets.

In summary, the current reset features a sharp price drawdown, but deeper structural engagement, resilient on-chain liquidity, and accelerating tokenization suggest this cycle’s foundations are stronger, not weaker, than those that preceded it.