The rapid expansion of global liquidity unlocks the mystery of the cryptocurrency market decline: Outlook for 2026

Why Is the Cryptocurrency Market Declining? Analyzing the Gap with Liquidity

The macroeconomic landscape appears contradictory at first glance. Despite the global M2 supply approaching a record high of $130 trillion and major central banks implementing easing policies one after another, the market capitalization of cryptocurrencies experienced a sharp 21% decline in Q4 2025. Understanding this paradox is a key to predicting the outlook for risk assets in 2026.

Current liquidity environment includes a $40 billion infusion into the banking system through the U.S. fiscal plan and three rate cuts by the Federal Reserve. However, despite these macro support factors, investor sentiment remains cautious, with regulatory uncertainties and profit-taking pressures suppressing the market.

Global M2: What the Record Highs Suggest About Structural Shifts

The state of global financial liquidity has changed dramatically. According to the latest data from Alphractal, global M2 has approached $130 trillion, setting a new historical high. This massive expansion of the money supply reflects simultaneous easing policies by central banks worldwide, both in developed and emerging markets.

Of particular note is the uneven distribution of this liquidity expansion. China holds about 37% of the total, or $47.7 trillion in M2, leading the global liquidity growth. Meanwhile, major economies like Japan, India, and South Korea show a contracting M2, indicating a polarization in the global financial environment.

China-Led Liquidity Expansion and Its Impact on International Capital Flows

China’s high M2 growth rate is not just a domestic phenomenon; it significantly influences cross-border capital movements. As some economies like Argentina and Israel face M2 contraction, liquidity spillovers from China are shifting investment positions in emerging markets.

Financial experts analyze that this uneven regional growth creates volatile capital flows, potentially amplifying volatility in international markets. Simultaneously, this expansion is driving reallocation of assets in East Asia and increasing interest in alternative assets, including cryptocurrencies.

Historical Correlation Between Liquidity and Risk Assets: The 2026 Scenario

Standard macroeconomic theory suggests that global M2 expansion is closely correlated with rising risk assets. Lower funding costs and cash inflows into banking systems tend to incline investors toward higher-risk, higher-return investments. This relationship has been consistent across past cycles.

However, in the current phase, this correlation is temporarily broken. Despite continued rate cuts and liquidity injections, the cryptocurrency market has fallen by 21%, well below its previous quarter’s peak. The main reasons for this divergence include:

• Regulatory Uncertainty: Policy environment ambiguity dampening investor confidence
• Profit-Taking Cycles: Transition from previous highs to correction phases
• Investor Caution: Short-term downward pressures outweigh macro support factors

Turning Point in 2026: Liquidity Expansion Supporting a Rebound

A key signal is that the long-term liquidity trend remains upward. With global M2 at record levels and central banks in the midst of easing cycles, a potential rebound in risk assets, including cryptocurrencies, is forming.

Experts predict that if liquidity expansion continues, there is a 20–30% rebound potential for cryptocurrencies by 2026, based on historical patterns. When market sentiment shifts and investors reassess macroeconomic tailwinds, the current decline could be viewed as an excellent buying opportunity.

Key Liquidity Indicators to Watch for Market Participants

Leading up to 2026, the following indicators will significantly influence the cryptocurrency market:

• Global M2 Trends: Maintaining or expanding the $130 trillion level to support risk assets
• Regional Liquidity Dynamics: Whether China’s policy continuation and U.S. fiscal support synchronize or diverge
• Investor Sentiment: Resolution of regulatory pressures and profit-taking cycles
• Capital Flows: Progress in reallocating into alternative assets

Conclusion: Balancing Macro Environment and Micro Psychology

As global liquidity reaches record highs and the expansion trend continues toward 2026, the question of why the cryptocurrency market is declining can be answered by the temporary divergence between short-term investor psychology and long-term macro support factors.

The rapid expansion of M2, especially led by China, is undoubtedly creating tailwinds for risk assets. The current 21% decline is likely just a correction within a larger structural liquidity expansion cycle.

For investors, the key is to continuously monitor these liquidity indicators and identify the timing of market psychology shifts toward 2026. The overall trend still favors risk assets, and if regulatory stability and investor sentiment recover, the cryptocurrency market could enter a significant rebound phase.