USDT liquidity drain puts crypto on the brink of a broad rout

USDT reserves on exchanges slid to $51.1bn, stalling crypto’s rally and testing a $50bn line.

Over two months, exchange reserves of the stablecoin USDT fell from $60bn to $51.1bn. The outflows stalled the crypto market’s gains in January and February, said the CryptoQuant analyst known as TopNotchYJ.

The Liquidity Drain: Is the Crypto Market Running Dry?

“Without a stabilization in stablecoin reserves and a return of active participants, the “pain” is likely to persist. Watch the $50B USDT level-it’s the last line of defense.” – By @yash717jain pic.twitter.com/WKtiV3QDOu

— CryptoQuant.com (@cryptoquant_com) February 26, 2026

He says the industry is nearing a critical threshold. Should USDT balances on trading venues slip below $50bn, the next support sits around $44bn. 

Losing that level would trigger heavy selling, sending leading assets such as Bitcoin, Ethereum and XRP into a deep correction. The analyst noted that Tether is the market’s main liquidity supplier. The “health” of the stablecoin sets the tone for the market.

On-chain data back up the waning interest: the number of active network participants fell from 376,000 to 263,000. Both retail and institutional investors have dialled down trading.

A rebound would require stabilising stablecoin reserves and the return of active traders. TopNotchYJ called the $50bn mark the last line of defence.

Institutions keep the faith

Since its October peak, Bitcoin’s price has nearly halved, dropping to $67,995 at the time of writing. The crypto market’s capitalisation has shed around $1trn.

Today’s sell-off differs markedly from the “crypto winter” of 2022. Back then, plunging prices coincided with the collapse of major platforms such as FTX, Celsius and BlockFi. This time, the plumbing has held: exchanges are stable and custodians solvent.

Traditional financial institutions continue to wade in. According to River, more than half of America’s largest banks already offer crypto products or are preparing to launch them. Faster integration widens the pool of prospective Bitcoin buyers should sentiment turn.

Bernstein’s senior analyst Gautam Chhugani calls the current slide “a routine crisis of confidence”. He says it is the mildest bear trend in the asset’s history, and still expects Bitcoin to reach $150,000 in 2026.

ETF outflows as part of consolidation

Many read the recent outflows from spot Bitcoin ETFs as a failure of crypto’s integration into traditional finance. Brett Munster of Blockforce Capital urged a broader view: the outflows amount to only about 6% of the tens of billions that have poured into the funds since their launch in January 2024. 

Moreover, in the fourth quarter, 17 of the 25 largest Bitcoin-ETF holders increased their positions. 13F filings show that the endowments of Harvard and Dartmouth continue to hold crypto assets. 

Supply squeeze

Fidelity Digital Assets estimates that public companies and spot ETFs together own nearly 12% of Bitcoin’s circulating supply. Such investors are long-term holders and are less likely to sell at the first hint of a correction. This creates a support base absent in past cycles.

Another factor is shrinking issuance. After the halving in April 2024, the flow of new coins halved, tightening freely available supply. If the trend holds, the next rebound could be sharper than markets expect.

Wall Street and crypto

Matt Hougan, Bitwise’s chief investment officer, argues that traditional investors and other crypto participants are overlooking the true scale of blockchain’s adoption in TradFi.

He says there is a stark gap between the industry’s caricature and reality. Traditional financiers underestimate the sector because of an “anchoring effect”—a reliance on first impressions. Many still associate crypto with early scandals such as Silk Road and the collapse of Mt.Gox.

“They do not understand that the industry has matured and is building the infrastructure that will underpin the next generation of capital markets,” Hougan noted.

Crypto investors themselves are also overlooking the trend. Tired of waiting for institutions in the past, they have stopped noticing concrete steps by big capital.

Wall Street moves on-chain

As evidence of a structural shift, Hougan listed recent initiatives by traditional financial institutions:

• BlackRock: the tokenised BUIDL fund, launched in part on the largest DEX, Uniswap, has topped $2bn;
• Apollo: the company will acquire 9% of leading DeFi protocol Morpho;
• banks: JPMorgan, Bank of America, Citigroup and Wells Fargo are discussing issuing a joint stablecoin, and JPMorgan launched a deposit token on the L2 network Base;
• SEC: the U.S. Securities and Exchange Commission announced Project Crypto to move financial markets on-chain;
• Fidelity: the firm posted a vacancy for a DeFi vaults product manager.

Market potential and risks

Hougan puts today’s tokenised-assets market at $20bn. By contrast, the combined capitalisation of ETFs, equities and bonds is about $285trn—leaving room for a 10,000-fold expansion.

It is unclear who will be the chief beneficiary of this transformation. The allocation of capital among:

• public L1s such as Ethereum and Solana;
• quasi-private networks;
• DeFi protocols;
• traditional players and crypto firms.

Bitwise’s CIO is adamant: now is not the time to pick winners. The optimal strategy is to build broad exposure to crypto while most investors mistakenly ignore the changes under way.

In January 2025, BlackRock representatives said that Bitcoin’s adoption since its inception has outpaced that of the internet and mobile telephony.