Author: Huobi Growth Academy

summary

In the first quarter of 2026, the crypto market experienced a historic deleveraging storm. Bitcoin retreated by more than 40% from its highs, Ethereum fell even more sharply, and altcoins generally halved in value. This crash was not simply caused by cooling market sentiment or regulatory rumors; it was the result of a confluence of three tightening liquidity factors: large-scale unwinding of yen carry trades, the US Treasury's TGA account restructuring drawing funds from the market, and a systemic increase in margin requirements in the derivatives market. These factors, combined with the crypto market's own high leverage structure and valuation bubble, triggered a stampede-like clearing. Looking ahead, the crypto market has moved beyond the "liquidity-driven" extensive growth phase and entered a new normal dominated by macroeconomic factors. Against the backdrop of an unclear Federal Reserve policy path and the contraction of global central bank balance sheets, crypto assets will face continued repricing pressure.

I. Historically High Valuations of US Stocks: The "Ceiling Effect" on Risk Asset Pricing

When analyzing the cryptocurrency market trend, an undeniable macroeconomic backdrop is that US stock valuations are at historically high levels. As the "pricing anchor" for global risk assets, US stock valuations not only reflect market expectations for US corporate earnings but also profoundly influence the valuation ceiling of the cryptocurrency market through asset price comparisons, investor risk appetite, and global capital flows. Multiple indicators confirm the current high valuation of US stocks. The Buffett Indicator shows that the ratio of total stock market capitalization to GDP has climbed to a historical extreme high of 230%, far exceeding the levels before the 2000 dot-com bubble and the 2007 financial crisis. The S&P 500's 12-month forward P/E ratio is 22.0, significantly higher than the 30-year historical average of 17.1, and close to the 25.2 during the dot-com bubble. The Shiller cyclically adjusted P/E ratio is approximately 38, second only to 44 in 2000. The price-to-sales ratio has exceeded 3.0, reaching a new historical high. These indicators collectively point to one conclusion: US stocks are significantly overvalued.

The high valuations of US stocks have been transmitted to the crypto market through multiple mechanisms. From the perspective of asset valuation, when US stock valuations are at historical highs, it means their expected future returns are declining. Rational investors will reassess their allocation to all risky assets, and crypto assets, as "marginal risk assets" with higher volatility, are often the first to be reduced. From the perspective of Federal Reserve policy constraints, the high valuations of US stocks put the Fed in a dilemma, limiting its room for easing and potentially leading it to remain hawkish for longer than the market expects, which is depressing for all risky assets. From the perspective of profit-taking, after years of gains, institutional investors are generally overweight in US stocks. When valuations reach extreme levels, they will systematically reduce their risk exposure, a process typically manifested in selling the assets with the largest gains and the best liquidity—including Bitcoin. From the perspective of risk sentiment, as a bellwether for global risk assets, the high valuations of US stocks will trigger investor wariness towards all assets with excessive gains and valuations that are difficult to quantify, with crypto assets being the most vulnerable to being dumped.

Historically, every instance of valuations reaching current levels has ultimately ended in a painful mean reversion. The lessons of 1929, 2000, and 2007 are vividly illustrated. The current unique characteristic of US stock valuations lies in the fact that they are a direct product of the longest and largest-scale experiment in loose monetary policy over the past 15 years. When these policies begin to be withdrawn, and valuations are at historical highs, the reversion process may be more dramatic than ever before. For the crypto market, this means that even if the fundamentals of the crypto industry itself continue to improve, macro-level valuation suppression will remain a significant obstacle for the next 1-2 years. Only after US stock valuations have returned to a reasonable range through time or spatial adjustments can the crypto market truly begin a new, healthy upward cycle.

II. Yen Carry Trade Closing: The "Invisible Pump" of Global Liquidity

The reversal of the yen carry trade was the trigger for the recent cryptocurrency market crash and the most crucial macroeconomic driver. For a long time, the Bank of Japan's zero-interest-rate policy made the yen the currency with the lowest global financing costs. International investors borrowed yen on a large scale, converted it into US dollars or other high-interest currencies, and invested in high-yield assets globally—including highly volatile cryptocurrencies.

In early 2026, the underlying logic of this arbitrage model began to falter. As inflationary pressures emerged in Japan, market expectations for the Bank of Japan to exit its negative interest rate policy surged. Japanese government bond yields jumped multiple times, with the 10-year yield breaking through 1.2%, reaching a multi-year high. This change directly compressed the interest rate differential between the yen and the dollar: when the cost of borrowing yen rises, while the expected return on dollar assets remains unchanged or even declines, the attractiveness of arbitrage transactions decreases dramatically.

More critically, when the yen begins to appreciate (the USD/JPY exchange rate falls from above 150 to the 140 range), arbitrage traders not only face narrowing interest rate differentials but also incur exchange rate losses. In this situation, the most rational choice is to close out positions: sell previously held overseas assets (including crypto assets such as Bitcoin and Ethereum) to obtain yen to repay loans. The crypto market's unique characteristics—24/7 trading and high liquidity—make it a prime target for arbitrage traders to sell off their holdings. Data clearly shows that during the few trading days of rapid yen appreciation in mid-February, Bitcoin and yen exchange rates exhibited a high degree of negative correlation, a typical characteristic of arbitrage position closing.

It's worth noting that the scale of yen carry trades is estimated at trillions of dollars, and the unwinding process is often continuous. As long as the Japan-US interest rate differential doesn't widen again and the yen's appreciation trend doesn't reverse, this "pump" will continue to draw funds from global risk asset markets. For the crypto market, which relies on incremental funds, this is undoubtedly a devastating blow.

III. TGA Account Reconstruction and Treasury Bond Issuance: Liquidity Siphoning by Fiscal Policy

If yen carry trades represent an international tightening of liquidity, then changes in the balance of the US Treasury's General Account (TGA) represent a direct drain on liquidity within the dollar system. The TGA account is essentially the Treasury's "wallet": when the Treasury increases its TGA balance by issuing government bonds or collecting taxes, it means funds are flowing from the commercial banking system into the Treasury's account, leading to a decrease in bank reserves and a tightening of market liquidity; conversely, when the Treasury spends (such as paying government contracts, social security, etc.), funds flow back into the market, increasing liquidity.

From February to March 2026, the market is facing a rapid rebuilding period for the Treasury General Account (TGA) balance. According to the financing plan announced by the U.S. Treasury Department, the TGA balance target for the end of March is to remain at $850 billion, with the April tax season expected to reach a peak of approximately $1.025 trillion. This means that in just two months, the Treasury will withdraw nearly $200 billion from the financial system. Simultaneously, to replenish the TGA and finance the fiscal deficit, the Treasury announced a large-scale quarterly refinancing plan in early February, with Treasury bond issuance exceeding market expectations.

This combination of "issuing bonds + increasing TGA balances" directly led to a continuous decline in bank reserves. For the crypto market, the transmission mechanism is more indirect but equally devastating: reduced bank reserves → financial institutions tightening credit → decreased financing capacity for hedge funds and market makers → forced reduction in risk exposure → crypto assets facing selling pressure. Stablecoin issuers' reserve assets are primarily US Treasury bonds; the TGA reconstruction has exacerbated volatility in US Treasury yields, indirectly impacting the redemption pressure and liquidity support capabilities of stablecoins.

Historically, dramatic changes in TGA balances have often been highly correlated with the price movements of risky assets. In early 2021, when TGA balances declined rapidly (due to fiscal spending), Bitcoin experienced a bull market surge; conversely, the TGA rebuilding process in early 2026 corresponded to a sustained decline and eventual collapse of the crypto market. This is not a coincidence, but rather an inevitable reflection of the liquidity cycle.

IV. Margin Increases and Derivatives Deleveraging: Forced Liquidation at the Exchange Level

Besides the tightening of liquidity at the macro level, the inherent fragility of the cryptocurrency market's derivatives structure also significantly amplified the crash. In early February, as the gold and silver markets experienced extreme volatility, the Chicago Mercantile Exchange (CME) repeatedly raised margin requirements for gold and silver futures. Although this measure was directly aimed at the precious metals market, its ripple effects quickly spread to the cryptocurrency market.

First, as the world's most important derivatives exchange, CME's margin adjustments have a demonstrative effect. After observing rising market volatility, the risk control departments of major cryptocurrency exchanges followed suit, raising margin requirements for perpetual contracts and futures and lowering leverage limits. For the cryptocurrency market, which heavily relies on leveraged trading, this is tantamount to forced deleveraging. A large number of highly leveraged positions were forced to close, triggering further price declines, which in turn triggered more liquidations, creating a negative spiral.

Secondly, the crypto market shares a common group of bullish investors with the precious metals market—macro hedge funds and trend traders. When these institutions suffer losses in the precious metals market due to margin increases, they often need to sell other assets (including crypto assets) to replenish margin or make up for losses. This cross-asset risk liquidation further exacerbates the selling pressure in the crypto market.

More noteworthy is that during this sharp decline, the Bitcoin-Ethereum futures premium quickly turned negative (forward discount), and the perpetual contract funding rate remained negative, indicating that the market has shifted from being bullish to being bearish. When the funding rate is negative for an extended period, it means that bulls not only bear the losses from price declines but also have to pay funding fees to bears, which further weakens their willingness to hold positions and prolongs the market's search for a bottom. Historically, only after the funding rate returns to neutral or even positive and the futures premium recovers can the market truly stabilize.

V. The inherent structure of the crypto market: a dual vulnerability of high valuations and dependence on liquidity.

Against the backdrop of tightening macro liquidity, the high valuations and high leverage inherent in the crypto market amplified the severity of the decline. Although crypto assets do not have a traditional price-to-earnings ratio (P/E ratio) valuation, we can assess their valuation levels through multiple dimensions:

• First, there's Bitcoin's market capitalization share. Before this crash, Bitcoin's market capitalization share had fallen below 40%, with a large influx of funds into various altcoins and DeFi tokens. This is a typical characteristic of the late stages of a bull market—funds chase high-risk, high-return tail-end assets rather than leading assets. When liquidity reverses, these high-beta assets are often the first to be hit, experiencing declines far exceeding those of Bitcoin.
• Secondly, there are changes in the total market capitalization of stablecoins. Stablecoins serve as "backup cash" in the crypto market, and changes in their total market capitalization reflect the willingness of off-exchange funds to enter the market. Data shows that since January 2026, the total market capitalization growth of USDT and USDC has stagnated or even slightly declined, indicating that the speed of new funds entering the market has not kept pace with the market's expansion needs. When the market relies on existing funds and leverage to maintain high levels, any liquidity shock could lead to a collapse.
• Third, there was a divergence between on-chain activity and price. In the months leading up to the crash, although Bitcoin prices remained high, metrics such as the number of active on-chain addresses and transactions did not reach new highs, and even declined. This indicates that the price increase was primarily driven by leveraged trading on exchanges, rather than genuine fundamental improvements or increased adoption. Leveraged price increases tend to be short-lived; once liquidity tightens, prices will quickly revert to their previous levels.

The crypto market is unique in that its participants are far more sensitive to macroeconomic liquidity than those in other asset classes. This is because the crypto market lacks traditional "endogenous cash flow," and its prices are entirely determined by the willingness of marginal buyers to enter the market. When macroeconomic liquidity is abundant, these marginal buyers (mainly risk-averse retail investors and hedge funds) have ample funds, driving up prices; when macroeconomic liquidity tightens, they are also the first to withdraw their funds. This recent crash is a vivid illustration of this mechanism.

VI. Market Outlook: Crypto Asset Repricing under the Liquidity Metrics Framework

Looking ahead, the cryptocurrency market will no longer be determined by a single factor, but will enter a new phase dominated by macroeconomic factors. Investors need to establish an analytical framework centered on liquidity indicators, focusing on the following variables:

First, there's the Federal Reserve's monetary policy path. While the market has some concerns about Warsh's hawkish stance since becoming Fed Chair, the more important factor is observing actual economic data. If the job market shows a significant cooling and inflation continues to decline, the Fed's tightening pace may be slower than expected. The CME FedWatch tool shows that market expectations for a rate cut in 2026 have been significantly lowered, but this has already been partially priced in. The key is when the Fed will release a clear signal of a policy shift.

Secondly, changes in TGA balance and net liquidity are crucial. Investors should closely monitor the weekly TGA balance data released by the U.S. Treasury Department, as well as changes in the Federal Reserve's balance sheet and ON RRP balance. Net liquidity (Federal Reserve Total Assets - TGA - ON RRP) is the most direct indicator of available cash in the market. If net liquidity continues to decline, the crypto market will continue to be under pressure; conversely, if net liquidity bottoms out and rebounds, a phase of rebound may occur.

Next, let's examine the evolution of yen carry trades. The USD/JPY exchange rate and the yield spread between 2-year US and Japan government bonds are two key indicators. If the yen's appreciation trend halts and the US-Japan yield spread stabilizes or even widens, the pressure to unwind carry trades will ease, which would be a positive signal for global risk assets, including the cryptocurrency market. Conversely, if the yen continues to appreciate, further deleveraging should be anticipated.

Finally, there are the structural indicators of the crypto market itself. Whether the total market capitalization of stablecoins has resumed growth, whether Bitcoin's market capitalization share has stabilized, and whether the funding rate for perpetual contracts has turned positive are all important references for judging whether the market has bottomed out. Historically, only when the funding rate remains positive, the futures premium recovers, and stablecoins flow back into exchanges does it mean that market confidence has truly been restored.

In terms of specific timing, the second quarter is typically a period of relatively tight liquidity (TGA balances peak during tax season), and coupled with the ongoing Federal Reserve balance sheet reduction, the crypto market may continue its volatile bottom-seeking trend. A real turnaround may not occur until the second half of the year—when TGA balances begin to decline and the market develops clearer expectations regarding the Fed's policy path.

VII. Conclusion: Saying goodbye to extensive growth and embracing the new normal of macroeconomics

The crypto market crash in the first quarter of 2026 was a systemic deleveraging event driven by macro liquidity and amplified by the crypto market's own structure. It marked the end of the extensive growth phase driven by loose liquidity since 2023, and the crypto market officially entered a new macroeconomic normal.

In this new normal, crypto assets, like other risky assets, will be profoundly affected by macroeconomic variables such as global central bank balance sheets, fiscal policies, and exchange rate fluctuations. The narratives of "crypto markets being desensitized to macroeconomics" and "digital gold's safe-haven attributes" have been disproven in this round of crashes—when a real liquidity crisis arrives, Bitcoin's decline is no less than that of tech stocks, and its correlation with the Nasdaq has risen to an all-time high.

For investors, this means developing a more macro-level analytical perspective, rather than solely focusing on project fundamentals or technological advancements. Liquidity indicators should be a core basis for investment decisions: monitor changes in net liquidity, whether SOFR rates are rising abnormally, whether the US Treasury volatility index MOVE is increasing, and whether high-yield credit spreads are widening. These macroeconomic variables will determine the beta direction of the crypto market, while project fundamentals only provide alpha opportunities after the beta is determined.

Of course, a sharp drop often breeds new opportunities. Once leverage is cleared, speculators leave, and valuations return to rationality, projects with genuine long-term value will present buying opportunities. However, caution is advised until a clear turning point in the macro liquidity environment emerges. For the crypto market, cash is the last scarce resource, and liquidity is the only truth.