From January 2 to 7, 2026, in the UTC+8 time zone, the Bitcoin and Ethereum contract markets experienced a round of concentrated liquidations. According to a single statistical measure, approximately $400-500 million in contract value was liquidated across the network, with significant exits from positions primarily in Bitcoin and Ethereum. During this time window, prices did not exhibit a typical cliff-like crash; instead, they fluctuated upward under the influence of capital, shifting the market's driving force from the previous "narrative market" centered around halving and various stories to a more direct game of capital flow and leverage structure. Data from the same source indicates that Bitcoin-related liquidations amounted to about $160-180 million, while Ethereum-related liquidations were around $77-103 million, with short positions dominating, reflecting a directional squeeze characteristic. Meanwhile, $471 million in net inflows into spot ETFs in a single day and the Federal Reserve's weekly balance sheet expansion of about $59.4 billion starting in January 2026 are becoming the core driving forces of the market, replacing the single narrative. Whether this round of volatility is a healthy clearing of the leverage chain or the starting point of a new capital-driven market needs to be analyzed through the two main lines of capital flow and leverage liquidation.
$400-500 Million in Contracts Evaporated: Who is Being Liquidated
● Scale and Distribution of Liquidations: According to a single data source, the scale of liquidations across the network from January 2 to 7, 2026, is summarized in the approximately $400-500 million range. Different data sources show discrepancies in total amounts, so this article uses a range expression without providing a single precise value. Within this range, Bitcoin-related liquidations are about $160-180 million, and Ethereum-related liquidations are about $77-103 million, together accounting for the vast majority of overall liquidations, reflecting the "core seismic" position of mainstream assets in leverage liquidation.
● Directional Squeeze Dominated by Shorts: In terms of long and short distribution, according to unverified data, long liquidations are about $63-77 million, while short liquidations are in the $330-390 million range, with a significantly higher proportion of short liquidations. Although this ratio still needs further cross-verification, it is sufficient as a directional reference to indicate that high-leverage shorts were under the most pressure during this round of volatility, with the market resembling a "reflexive counterattack" against concentrated bearish positions rather than a symmetrical clearing.
● Relationship Between Time and Price: Combining the market performance from January 2 to 7, prices were generally in a fluctuating upward structure, with high-leverage shorts passively reducing positions against the backdrop of rising prices, exhibiting typical characteristics of a capital-driven market: spot and low-leverage buying pushed prices up, while high-leverage shorts faced passive liquidations during fluctuations, further driving prices upward. It is important to emphasize that due to limitations in data and market records, this article deliberately avoids correlating specific candlestick points with liquidation amounts and does not attempt to construct "precise trigger points" at a single exchange or moment, but rather focuses on the overall leverage clearing structure within the range.
● Boundaries of Data Uncertainty: Various total amounts, including $355 million and $527 million, have circulated in the market regarding this round of liquidations, with each statistical measure not entirely consistent. This article only summarizes within the "approximately $400-500 million" range, without providing precise totals or the number of participating accounts, nor does it break down the detailed distribution across different platforms, to avoid misleading readers into thinking they have a "complete picture of participants" under disputed statistical measures.
ETF Capital Inflows and Emotional Recovery
● Capital Turning Point Signal: During the same period, the capital flow of the spot Bitcoin ETF showed a key turning point. From November to December 2025, the spot Bitcoin ETF had a cumulative net outflow of $4.57 billion, reflecting institutions' continued reduction of exposure to Bitcoin during that time. However, on January 2, 2026, a single day recorded a net inflow of $471 million, which, against the backdrop of continuous outflows, has significant signaling meaning, indicating that incremental capital is re-entering Bitcoin assets through compliant tools.
● Spot Buying and Contract Squeeze: The capital inflow from the spot ETF first raised buying on the spot side, pushing spot prices upward while compressing the short space in the contract market. As prices rise and expectations improve, the futures basis and funding rate structure will adjust accordingly, forcing high-leverage shorts to continuously add margin or passively reduce positions. Once prices break through certain key ranges, the chain reaction of concentrated liquidations of high-leverage shorts will be triggered. This process, initiated from the ETF redemption side and gradually transmitted to the contract market, is a typical "spot-driven derivatives" capital chain.
● Amplification of ETF and Short Game: Given the fact that short liquidations dominate this round, the new buying from ETFs can be seen as a more patient, lower-leverage spot force, while high-leverage contract shorts are under dual pressure from liquidity and margin. When ETF net inflows raise spot prices, high-leverage shorts first face unrealized losses and margin call pressures. During amplified volatility and slightly tense liquidity, some positions cannot keep up with the margin call pace and can only be passively liquidated, further driving prices upward. This "butterfly effect" amplification means that relatively limited net inflows into the spot market can trigger larger-scale contract liquidations.
● Phase Recovery of Emotional Indicators: Alternative data shows that the Fear and Greed Index rose from a weekly average of 21 to 42, moving from the "extreme fear" range back to near neutral levels. This change indicates that after the continuous adjustments at the end of 2025 and the net outflows from ETFs, market sentiment has partially recovered from excessive pessimism. Although this round of volatility was accompanied by large liquidations, it resembles a directional squeeze against previously concentrated bearish positions in the context of emotional recovery and capital inflow, rather than a panic-style "crash," which also weakens the narrative space of "another round of systemic panic."
Shift to Easing and Accelerated Macro Liquidity
Changes in the funding environment at the Federal Reserve level provide a higher macro backdrop for this round of Bitcoin capital transition. After about three years of quantitative tightening, starting in January 2026, the Federal Reserve began to expand its balance sheet by about $59.4 billion weekly, indicating that its balance sheet is no longer shrinking unidirectionally but is re-releasing liquidity into the market. From an asset allocation perspective, balance sheet expansion often enhances overall risk appetite, with some capital being drawn from relatively limited-yield bonds and money market instruments to allocate to high-β assets, including tech stocks, certain high-yield credit assets, and financial products related to Bitcoin. This process is not simply "printing money to buy coins," but gradually reveals itself through rebalancing logic: when expectations for risk-free interest rates decline, the discount rate for risk assets decreases, naturally allowing for greater pricing elasticity.
At the same time, former New York Fed President Bill Dudley's view that "stablecoins cannot solve the U.S. Treasury's debt service cost problem" emphasizes that current fiscal constraints still exist. Even with a temporarily loose monetary environment, the U.S. Treasury's pressure on interest payments and debt rollovers has not been alleviated by technical tools. This means that the Federal Reserve's balance sheet expansion does not equate to a complete abandonment of constraints, but rather a rhythmic adjustment based on economic and financial conditions. For the Bitcoin market, macro liquidity is more transmitted through indirect paths:
On one hand, institutional investors, in managing their portfolios, will dynamically adjust their weights in risk assets based on the Federal Reserve's balance sheet, interest rate expectations, and volatility levels, including increasing or decreasing exposure to Bitcoin through spot ETFs, futures ETFs, and over-the-counter products. On the other hand, over-the-counter lending and hedge funds will also build multi-asset strategies in a monetary easing environment at lower financing costs, with some capital potentially flowing into the Bitcoin spot and derivatives markets, forming a "macro → traditional assets → crypto assets" transmission chain. It is important to emphasize that this macro capital does not directly generate new buying on-chain but is "packaged" through compliant products, structured over-the-counter products, and market-making channels before ultimately reflecting in exchange transactions and on-chain migration actions.
Institutions Slowly Accumulate, Retail Investors Liquidated on High Leverage
On-chain and over-the-counter movements show that institutions and large holders have a noticeably different rhythm and tool selection when allocating Bitcoin compared to high-leverage retail investors. On-chain data indicates that Marathon Digital recently transferred approximately 519.46 BTC to FalconX, worth about $48.3 million at the time, which is typically interpreted as optimizing asset management and liquidity through a professional brokerage platform rather than simple short-term speculation. At the same time, the market has also observed signs of new whale addresses and Tether continuously increasing their Bitcoin holdings, indicating that some long-term capital is gradually accumulating rather than waiting for a complete confirmation before chasing higher prices.
In contrast, SharpLink publicly stated that it "100% holds Ethereum and 100% stakes it," highlighting that some institutions prefer paths of low leverage and long-term yield accumulation: on one hand, holding core assets to gain potential price appreciation, and on the other hand, utilizing staking mechanisms to obtain continuous cash flow, enhancing overall yield without relying on high leverage. Whether it is Marathon Digital's asset migration or SharpLink's high staking ratio, both essentially reflect institutions' "slow rhythm" in risk management and yield expectations: exchanging time for space, using structured tools rather than unidirectional leverage to amplify returns.
From a behavioral finance perspective, institutions often rely on multi-dimensional tools such as spot, ETFs, over-the-counter lending, and staking to configure positions, emphasizing drawdown control and portfolio stability; while retail investors, especially contract retail investors, tend to use high-leverage futures or perpetual contracts to seek amplified volatility returns in a short time. This behavioral difference was amplified in this round of liquidations: the predominance of short liquidations can largely be seen as a "concentrated education" on short-sighted, high-leverage strategies. When the funding environment and trend expectations show marginal improvement, those betting on continued declines without risk buffers are the first to be liquidated. Institutions are slowly accumulating on low leverage and long cycles, while retail investors are being concentratedly liquidated on high leverage and short cycles, forming a typical layered structure during this capital transition period.
From Narrative Market to Capital Landscape: The Shift in Bitcoin's Driving Force
Looking back over the past two years, a significant portion of Bitcoin's market has revolved around grand narratives such as "halving," "institutional adoption," and "on-chain innovation," with price fluctuations resembling early pricing of future stories. During this phase, investors generally focused their attention on the topics and expectations themselves, with relatively low sensitivity to capital structure, leverage distribution, and macro liquidity rhythms. However, in the recent round of volatility, the driving force has clearly shifted from the narrative side to the capital landscape: the redemption data of spot ETFs, the Federal Reserve's balance sheet expansion rhythm, large on-chain asset migrations, and institutional accumulation in the over-the-counter market have become key variables explaining price fluctuations and leverage liquidations.
In the capital-driven phase, price elasticity depends more on the rhythm of incremental capital and the structure of leverage positions rather than the strength of a single story. Once the ETF side shifts from net outflows to net inflows, even if the scale is not sufficient to replicate the capital magnitude of the previous bull market, it is enough to trigger a round of directional liquidations in the context of a fragile existing leverage structure. The concentration of short liquidations and the shift in sentiment from extreme fear to neutrality indicate that the market's previous pessimistic expectations of "narrative failure and Bitcoin losing its attractiveness" may have been overvalued. When capital flows back in and macro liquidity shifts, Bitcoin's high-β attribute is reactivated by the market, and its price sensitivity to marginal changes in capital significantly increases.
This shift in driving force places higher demands on future trading strategies. Simply relying on a single on-chain indicator, technical pattern, or narrative is no longer sufficient to explain and capture the main fluctuations during the capital transition period. Investors need to systematically focus on several core variables: first, the redemption data of ETFs and other compliant products; second, the position structure and leverage levels of futures and perpetual contracts; third, the central bank's balance sheet and macro liquidity indicators; and fourth, large on-chain migrations and institutional behavior signals. In a capital-driven market, those who perceive and understand changes in capital flows and leverage structures earlier are more likely to prepare their positions and risk management before volatility amplifies.
After Liquidations: A Healthy Clearing or the Starting Point of a New Market Trend
Considering the current liquidation scale of approximately $400-500 million, the short-dominated clearing structure, the turning point of spot ETF funds shifting from a cumulative net outflow of $4.57 billion to a single-day net inflow of $471 million, and the macro backdrop of the Federal Reserve expanding its balance sheet by about $59.4 billion weekly starting in January 2026, this market trend appears more like a directional squeeze on high-leverage bearish positions during the capital inflow process rather than a systemic risk event. As a result, some high-leverage shorts have been cleared out, the leverage structure has been temporarily sorted out during price increases, and the capital situation has shown marginal improvement under the combination of ETFs and macro liquidity, making this combination closer to the "healthy clearing" paradigm.
However, risks and uncertainties cannot be ignored. First, there are statistical discrepancies in the liquidation data itself, with various versions not entirely consistent in total amounts and distributions. The "approximately $400-500 million" range used in this article is merely a relatively robust summary, not a precise measurement. Second, whether the Federal Reserve's balance sheet expansion will continue long-term and whether the pace will be affected by inflation and fiscal pressures remains highly uncertain and cannot be simply extrapolated as long-term unilateral easing. Third, after experiencing a single-day net inflow, whether the spot ETF can maintain a continuous inflow of incremental capital also requires further observation. If it turns back to net outflows, the current capital-driven structure may quickly reverse. Therefore, this round of volatility should not be directly interpreted as a clear starting point for a new unilateral upward market trend.
On the operational level, the most direct insight from this round of liquidations is to reduce reliance on excessively high leverage and shift the focus from short-term price fluctuations to upstream capital and structural information. Specifically, on one hand, it is necessary to increase the tracking weight of ETF redemption data and the capital flow of compliant products to timely capture changes in the rhythm of incremental or decremental capital; on the other hand, continuous attention should be paid to changes in the balance sheets of major central banks, including the Federal Reserve, to grasp the marginal turning points in the macro liquidity environment. At the same time, large on-chain migrations and institutional asset reallocation behaviors should also be viewed as important windows for observing the medium- to long-term direction of capital, rather than isolated "whale activity" stories.
Looking ahead, if the spot ETF continues to maintain net inflows, the Federal Reserve's balance sheet expansion rhythm generally continues, and global risk appetite remains relatively high, then the capital-driven characteristics may further strengthen, and the price elasticity to incremental capital still has room for release. Bitcoin is expected to enter a new phase of capital games after a healthy clearing. Conversely, if the macro environment tightens due to recurring inflation or increased fiscal pressures, or if ETF funds turn back to net outflows, the leverage side may face a new round of severe liquidations, and the direction may not necessarily be on the short side. For participants, this round of "liquidations of $400 million" resembles a rehearsal in the capital transition cycle: those who structurally adapt to the logic of capital-driven markets in advance will have the opportunity to take the initiative in the next round of volatility, rather than passively becoming the ones being liquidated.
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