After reaching an all-time high of roughly $4 trillion in total market value in October, crypto markets have entered one of their sharpest corrections in years.
Bitcoin, which peaked near $126,000 during the rally, has since retraced to the low $60,000 range. Billions of dollars in leveraged positions have been liquidated, open interest has contracted sharply from late-year highs, and liquidity across trading venues has thinned. ETF flows have turned negative, reinforcing a broader phase of institutional de-risking.
The speed of the unwind has revived a familiar question: when volatility spikes and liquidity compresses, how do institutions actually respond?
For Sheldon Hunt, the pullback tells a different story than the headlines suggest. As founder and CEO of Sundial, a Bitcoin Layer-2 protocol targeting institutional participation, he sees institutions simplifying their exposure instead of abandoning it.
“When you see volatility like this, what pulls back first is risk, exposure, and complexity,” Hunt told BeInCrypto during our conversation at Liquidity Summit 2026 in Hong Kong, further adding:
“Institutions are not necessarily cutting all exposure. They are consolidating. They go back to basics.”
That return to basics, Hunt says, is best understood as a flight to quality.
When volatility spikes, institutions tend to reduce exposure to more complex or risk-centric applications. Rather than chasing new strategies, they narrow their focus. He added:
“You can pull back on some of these complexities, variants like DeFi. You want to get back to something like the basics.”
In addition to allocation shifts, Hunt also watches on-chain behavior for early signs of stress.
“Wallets generally don’t lie,” he said, describing wallet activity as one of the clearest barometers of market health.
During volatile periods, he observes assets moving off exchanges and DeFi platforms and reconsolidating into fewer wallets. That movement, he argues, reflects caution rather than capitulation.
Hunt does not view the current shift as a brief pause. In his assessment, the market is operating under real liquidity strain.
“We’re living in it right now,” he said. “There are certainly constraints around liquidity these days. People are quite nervous.”
He points to volatility across broader markets and tightening financial conditions as reinforcing that caution. For institutional capital, that environment changes the tempo of decision-making.
Hunt believes that capital allocators are likely to proceed more cautiously under current liquidity constraints.
“There’s still a real possibility that this is the beginning of a fairly nasty bear market that could go on for potentially two or more years,” he said.
If the downturn extends, timing matters less than resilience. Allocators focus on maintaining exposure without introducing additional fragility. He described the current phase as “minimizing risk exposure and looking to be in it for the long run.”
That framing also informs how institutions approach Bitcoin yield.
Hunt said one of the most common misconceptions is that institutions are primarily focused on maximizing returns. In practice, he argued, that assumption does not reflect how professional allocators operate.
According to Hunt, professional allocators are unlikely to pursue 20% or 30% yields on their Bitcoin if those returns depend on layered complexity or unclear counterparty structures.
“The reality is that institutions are focused on minimizing risk,” he said. “Stable and secure yield over the long run, even 1% or 2%, is far more aligned with their mandates.”
In practical terms, that shapes how products are evaluated. Yield levels alone are not the deciding factor. Custody arrangements, settlement mechanics, and downside scenarios tend to carry more weight in internal reviews.
Despite the growing conversation around Bitcoin-native finance, Hunt believes meaningful institutional deployment remains limited. Hunt added:
“There’s this idea that there’s all of this Bitcoin out there, it’s all sloshing around. The reality is that we have seen very little Bitcoin being put to work on DeFi or being put to work in either the protocols or layer-2s.”
A large share of BTC continues to sit in long-term custody. For Hunt, that signals that the infrastructure layer is still developing rather than saturated.
“It’s still early days,” he said. “The best days of Bitcoin are very much ahead of it. The best days of DeFi are ahead of it. There’s still so much more to be untapped.”
The slower pace of institutional participation, in his view, reflects how risk is assessed. Before capital moves into structured yield environments, questions around custody control, settlement assurance, and exposure concentration must be addressed in ways that align with existing mandates.
Looking toward the next cycle, Hunt expects architecture to matter more than surface-level features.
“I’m of the very firm belief that in this next cycle, a big priority is going to be around non-custodial options,” he said, pointing specifically to non-custodial staking and settlement models that account for custodial risk.
In his view, institutions want clarity over who controls assets at every stage of the process. In practice, that means retaining unilateral authority over settlement and custody. The crypto industry has long championed the idea of being one’s own bank. For institutional allocators, that principle shows up less as ideology and more as governance architecture. The next phase of adoption will depend on whether that architecture can satisfy traditional risk frameworks.
