Crypto assets recorded a negative annual return in 2025. REUTERS
The global cryptocurrency market is expected to remain under pressure in early 2026 before stabilising and potentially recovering in the second half of the year, as liquidity conditions improve and capital rotates across asset classes, says digital asset fund manager Merkle Capital.
Thanalop Preedamanoch, fund manager at Merkle, said 2025 was significantly more challenging than investors anticipated, with crypto marking a clear break from the traditional four-year cycle.
For the first time, the market failed to deliver a sharp, parabolic rally, instead moving in a slower and more incremental fashion, he said.
“This shift reflects a structural change in crypto markets,” said Mr Thanalop.
“Institutional investors now play a far greater role, replacing the retail-driven, high-leverage speculation that dominated earlier cycles. While this has reduced extreme volatility, it has also slowed upside momentum.”
According to Merkle, crypto assets closed 2025 with negative annual returns, compounded by a major liquidation event on Oct 10 that drained liquidity from the system.
Following that episode, digital assets began to decouple from traditional assets such as equities and gold, highlighting the sector’s sensitivity to marginal liquidity conditions.
“2026 is expected to be uneven. The market structure remains technically weak and sentiment surrounding strategy-related entities continues to weigh on confidence. With these factors, Bitcoin accumulation has slowed across both corporate treasuries and exchange-traded fund flows,” he said.
“As downside risks still dominate in the near term, liquidity will ultimately determine the medium-term direction.”
Mr Thanalop noted monetary conditions could ease after the appointment of a new Federal Reserve chair in May, with markets anticipating a more growth-tolerant policy stance.
Historically, liquidity has tended to improve ahead of US midterm elections in November, providing a potential tailwind for risk assets, including cryptocurrencies, in the latter half of the year.
Another key theme for 2026 is capital rotation. While the macro backdrop of moderating inflation, steady growth and a resilient labour market remains broadly supportive of risk-taking, heavily crowded trades, particularly technology and artificial intelligence-related stocks on the Nasdaq, are facing valuation pressure as earnings struggle to justify elevated prices, according to Merkle.
As the risk of multiple compression increases, he said capital is likely to rotate into areas with more attractive valuations, such as value stocks on the S&P 500 and small-cap equities on the Russell 2000.
Historically, crypto markets have shown a positive correlation with small caps, suggesting they could benefit indirectly from this rotation, noted Merkle.
“We expect a gradual shift away from short-term, momentum-driven digital asset speculation towards projects with clearer fundamentals. Tokenisation is likely to emerge as a defining theme, supported by regulatory signals favouring on-chain financial products and growing institutional interest in real-world asset tokenisation,” said Mr Thanalop.
“Retail investors are also becoming more selective, moving away from purely speculative tokens and towards projects with sustainable revenue models and long-term economic relevance.”
He cautioned that cryptocurrencies and digital tokens remain high-risk assets, and investors should carefully assess information and align investments with their individual risk profiles.