Tail risks for 2026: where Bitcoin sells off, and where it reprices

Bitcoin increasingly trades as part of the global macro complex rather than as a self-contained niche asset. In stress, the dominant drivers are often not crypto-specific. They are liquidity, leverage, rates volatility, and the willingness of investors to hold duration and risk. That framing matters for tail risks, because the initial price response is often shaped by forced behaviour rather than fundamentals: deleveraging, widening spreads, reduced market depth, and an urgent preference for cash.

The more useful way to think about these scenarios is in phases. The first phase is typically mechanical: risk is cut, correlations rise, and high-beta exposures are trimmed regardless of narrative. The second phase is interpretive: policy response, sanctions and capital controls, inflation dynamics, or institutional credibility determine whether Bitcoin remains a casualty of tightening financial conditions or begins to benefit from a shift in how investors assess monetary and geopolitical fragility. The analysis below follows that logic, focusing less on single-point forecasts and more on transmission channels that could plausibly shape Bitcoin’s path.

Across most tail risks, the common near-term outcome for Bitcoin is therefore fairly consistent, it tends to sell off alongside other liquid risk assets. That is not always a judgement on Bitcoin itself, but a reflection of portfolio mechanics. When volatility spikes and liquidity thins, investors raise cash, cut leverage, and correlations compress. Bitcoin is liquid and widely held, so it is often sold in the first wave.

Where outcomes differ is what happens after that initial liquidation impulse. If the shock tightens financial conditions for a sustained period, higher real yields, a stronger dollar, wider credit spreads, and weaker market depth, Bitcoin often struggles or grinds lower in a choppy, risk-averse regime. If the episode instead triggers a policy response that restores liquidity, easing, fiscal support, or other backstops, Bitcoin has historically been prone to recover faster and sometimes outperform as risk appetite returns.

Over the long term, the tail risks most supportive for Bitcoin tend to be the ones that change behaviour rather than just repricing risk, especially events that introduce capital controls, sanctions, asset freezes, or political instability that undermines confidence in institutions. In those regimes, the marginal use case shifts from speculative exposure to monetary optionality: an asset that can be held outside the domestic banking system, moved across borders, and settled without needing permission. That does not guarantee an immediate rally, and it often follows an initial liquidity-driven drawdown, but persistent controls and politicisation of money can create steady, durable demand from corporates and households seeking portability, censorship resistance, and diversification away from sovereign risk. The more lasting the restrictions and the more fragmented the financial system becomes, the more credible that structural bid can be, particularly once volatility normalises and investors are allocating by choice rather than selling under pressure.

Of course, tail risks are by definition not a core scenario, but it is important to be cognisant of them. As such we have compiled a list of tail risks for 2026 and their potential impact on Bitcoin and the wider digital asset market. And embracing the on-chain world, prediction markets such as Polymarket are becoming a useful way to gauge how investors are pricing the probability of these events.

A major cyber-attack on financial infrastructure

A large-scale cyber event targeting payment systems, clearing networks, or major banks is a stress test of operational trust. In the acute phase, markets prioritise continuity and liquidity, and the immediate effect can be impaired market functioning rather than a clean repricing of fundamentals. Crypto is not immune to this, because centralised exchanges, custodians, and fiat rails remain critical for access and liquidity.

Bitcoin can therefore be pressured initially by reduced liquidity and disorderly trading conditions. The medium-term interpretation depends on what fails. If legacy rails are visibly fragile while decentralised settlement continues to operate, the episode can strengthen the investment case for a globally distributed system that does not rely on a single operator. Price outcomes could plausibly follow a dip-and-recovery pattern, but that recovery would be conditional on market functioning returning and investors regaining the ability to allocate rather than liquidate.

Exchange or stablecoin failure

A failure of a major centralised exchange or a systemically important stablecoin is a direct hit to crypto market structure. The initial transmission channel is mechanical: forced liquidations, impaired on and off ramps, and a sharp confidence shock that raises the required risk premium across the ecosystem. In that setting, Bitcoin can fall significantly even if it is not the epicentre, simply because it is the most liquid asset in the complex and becomes the source of funds.

The medium-term path depends on whether the failure leads to constructive cleanup or prolonged repression. A credible post-crisis shift toward transparency, robust custody, and stronger venues can ultimately strengthen the market’s foundations (as was seen post FTX), but the price path is often uneven because trust rebuilds slowly. Even in a recovery, the market may demand a higher structural discount for counterparty and regulatory risk.

China–Taiwan escalation or a South China Sea naval incident

A serious escalation in the Taiwan Strait or a naval incident in the South China Sea would represent a shock to trade confidence and supply chains, with semiconductors at the centre of the transmission mechanism. The macro problem is that it can be both inflationary and growth-negative, creating uncertainty about policy response and increasing volatility across FX, rates, and equities.

Bitcoin would likely face initial downside pressure in the standard risk-off phase, especially if the dollar strengthens and liquidity tightens. Beyond that, the analysis becomes more nuanced. Capital controls, regional capital flight, and fragmentation of financial rails can increase demand for portable assets, but those effects may be episodic rather than continuous. There are also crypto-specific second-order effects through mining hardware supply chains and energy prices, which can influence sentiment around network economics even if the protocol continues to function normally. A reasonable expectation is heightened volatility with the possibility of an uneven recovery if macro conditions remain tight, and a more constructive medium-term profile if the episode accelerates financial fragmentation and raises demand for neutral settlement.

AI capex cycle overshoot

An overshoot in AI investment is a classic misallocation risk: heavy capex financed through debt and equity issuance, followed by disappointing returns, multiple compression, and tighter credit. The transmission to Bitcoin is indirect but still meaningful. If the unwind drives a broader de-risking in growth assets, Bitcoin can be dragged lower through correlation with high-duration risk, especially when liquidity is shrinking.

The more interesting question is whether Bitcoin remains a passenger or becomes a destination. In a conventional tech-led drawdown, Bitcoin may initially trend lower. If the bust triggers monetary easing or fiscal support, Bitcoin can respond positively as liquidity returns. There is also a plausible rotation case where investors seek exposures that are not tied to earnings revisions or capex cycles; that can support relative performance, but the timing is uncertain and would likely depend on whether Bitcoin’s volatility is falling while traditional growth assets remain unstable.

A policy error by the US Federal Reserve

A Fed policy error is best viewed as a catalyst for a regime shift in liquidity. Overtightening into recession compresses credit creation, weakens risk appetite, and can provoke asset deflation. Over-easing can destabilise inflation expectations, weaken the dollar in certain configurations, and increase term premium if the market questions the credibility of the policy path. The current quest for a President Trump approved FED Governor with a dovish persuasion increases the risks of such an event.

Bitcoin’s near-term response depends on which side of the error dominates. In an overtightening scenario, the most likely outcome is a broad drawdown driven by tightening financial conditions and a rise in the cost of capital. The more severe the recessionary impulse, the more likely Bitcoin trades with high-beta risk. In an over-easing scenario, the impulse can be supportive, but not necessarily in a straight line. If easier policy initially boosts risk appetite but later reignites inflation fears, Bitcoin can experience a two-step dynamic: an early rally on liquidity, followed by choppier price action as rates volatility reasserts itself. Over longer horizons, the key variable becomes confidence in fiat stability. If credibility erodes and financial repression becomes the market’s base case, Bitcoin can benefit structurally, but the transition can be messy.

US constitutional crisis and heightened political risk

A major political crisis in the United States can raise volatility and policy uncertainty. The direct economic impact can be limited unless it spills into fiscal credibility, debt-ceiling risk, or budget dysfunction. Markets tend to react quickly to uncertainty, even when the long-run macro effects are unclear. We see President Trump being impeached as a form of constitutional crisis and

Bitcoin’s response in the acute phase is likely to be tied to overall risk appetite, which points to near-term downside or choppy trading, but would also likely lead to fears over recent crypto-friendly policies being unwound, exacerbating price declines. Over a longer horizon, the key variable is whether institutional credibility and fiscal governance become a sustained concern. As many of the recent crypto-friendly policies are in being passed by the Senate, such as the Stablecoin and Genius Acts, it is much harder for an incoming president to unwind these through an executive order.

A Russian military attack on a NATO country

A Russian strike on a NATO member would raise the probability of a wider conflict via Article 5 and materially increase the risk premium across markets. The immediate transmission channel is straightforward: a severe risk-off shock, likely concentrated in Europe but quickly global through energy, FX, and credit. Energy prices would be a key accelerant, both because of supply concerns and because energy volatility tends to spill into inflation expectations and rates.

For Bitcoin, the first-order effect is likely to be dominated by liquidity dynamics rather than ideology. In a sudden de-risking episode, investors tend to sell what they can, not what they want, and Bitcoin often sits in the sellable bucket alongside other liquid risk assets. That can produce abrupt drawdowns and unstable intraday price action, particularly if market depth thins and derivatives positioning is one-sided.

The more interesting question is the second-order regime. If the conflict catalyses harsher sanctions, reserve seizures, or tighter capital controls, the case for neutral, portable assets becomes more salient. Under that regime, Bitcoin’s behaviour can shift from tracking equity beta to reflecting demand for assets that are harder to censor or confiscate. The path would not need to be a clean reversal; a plausible pattern is an initial liquidation-driven decline, a stabilisation phase as volatility normalises, and then a more durable bid if the geopolitical environment remains restrictive and the marginal buyer begins to prioritise monetary optionality.

Sovereign adoption or rejection events

Sovereign actions matter because they shift the perceived legitimacy and accessibility of Bitcoin. Adoption by a large or symbolically important country can open new demand channels and reduce career risk for institutions, often producing strong momentum and reflexive inflows. Rejection through bans or severe restrictions typically hits sentiment first and can trigger sharp, headline-driven sell-offs.

The analytical distinction is durability. Rejection tends to re-route activity rather than eliminate it, so the long-run damage is often less than the initial price response implies. Adoption can be more structurally supportive, but the scale depends on the country’s economic weight, capital openness, and follow-through. Bitcoin’s reaction is likely to be asymmetric: policy-driven downside moves can be sharp but may fade as the network adapts, while credible adoption can have longer-lasting effects through flows and institutional positioning.

Japan yen carry trade collapse

A disorderly unwind of the yen carry trade would be less about geopolitics and more about the global plumbing of leverage. If Japanese yields rise sharply or the Bank of Japan signals a decisive policy shift, the unwind can propagate through repatriation flows, rising global yields, and forced deleveraging. The relevance is amplified by the scale of Japan’s external asset holdings, including roughly US$1.1–1.2 trillion in Treasuries, and the broader role of yen funding in global risk positioning.

Bitcoin’s sensitivity here is primarily a function of global financial conditions. If yields gap higher and volatility in rates increases, the cost of leverage rises and risk budgets compress. In that environment, Bitcoin can decline as part of the broader deleveraging impulse, not necessarily because the asset is being singled out, but because it sits in the high-convexity portion of portfolios.

Price outcomes can vary materially depending on whether the unwind is orderly or chaotic. An orderly repricing of Japanese policy could lead to a grinding risk-off regime and persistent headwinds for Bitcoin. A chaotic unwind can produce sharper downside, but it also increases the probability of a policy response elsewhere, either explicitly through easing or implicitly through liquidity support, which can later provide a tailwind. One plausible medium-term pattern is downside pressure during the tightening phase, followed by a recovery that is more sensitive to whether global central banks choose to lean against disorderly market functioning. If the carry trade unwind begins to destabilise the traditional financial system it is highly likely to support alternative financial systems such as Bitcoin.

Renewed inflation shock

An inflation resurgence matters less for the headline number and more for the reaction function of central banks and the behaviour of real yields. Commodity spikes, supply shocks, or wage persistence can all reprice the expected path of rates. In many episodes, risk assets respond negatively because higher real yields compress valuations and tighten financial conditions.

Bitcoin’s response is ambiguous in a way that is analytically useful. If inflation triggers aggressive tightening and real yields rise, Bitcoin tends to struggle alongside other risk assets. If inflation is persistent but policy is constrained, either politically or financially, and real yields remain suppressed, Bitcoin can attract flows as an alternative store-of-value exposure. Stagflation is the most complex sub-case: growth deteriorates while inflation remains elevated, producing unstable cross-asset correlations. In that environment, Bitcoin can alternate between behaving like a risk asset on growth-scare days and like a monetary alternative on currency-debasement days, leading to volatility and uneven trend formation rather than a single clean directional move.

Iran state failure

A regime crisis or state failure in Iran would most immediately transmit through energy markets and regional security risk. Oil volatility can feed inflation fears and increase rates volatility, which typically weighs on risk appetite. The initial market response would likely be risk-off, with a preference for traditional safe havens.

Bitcoin may come under pressure initially if the episode tightens financial conditions. The second-order channel is geopolitical and monetary: sanctions dynamics, cross-border settlement frictions, and capital controls can increase the appeal of neutral assets for certain users. In this scenario, Bitcoin’s price response could plausibly be modestly negative at first and then either stabilise or grind higher if energy-driven inflation and geopolitical fragmentation begin to dominate investor narratives. We are already hearing of Bitcoin and Stablecoin usage increasing during recent protests due to the blockchain’s non-sovereign features, a very positive use case in our view and will likely support longer term prices as investors discover Bitcoin has merits outside simply being digital gold.

Summary & unknown unknowns

True surprises usually begin as liquidity events. When uncertainty jumps, investors hoard cash and cut risk, and Bitcoin often suffers alongside other liquid assets. Over longer horizons, systemic shocks that erode trust in institutions, payment rails, or monetary governance can become supportive for Bitcoin’s role as an alternative asset. The transition between those phases is the central challenge. It depends on whether the shock produces sustained tightening in financial conditions or instead provokes a policy response that stabilises markets while weakening confidence in existing systems.