Nanoscale Li4Ti5O12 (LTO) is considered a promising anode material for Li-ion batteries because of its outstanding safety. However, cointercalation-induced structural relaxation adversely affects its Li-ion storage properties. Therefore, there is a need to elucidate the connection between electrochemistry and LTO structural relaxation of nano-LTO. Herein, various LTO nanosheet crystals with designated degrees of residual strain were prepared by varying the annealing temperature. The cyclability and rate capability of the prepared 2D LTO nanocrystals were evaluated. During annealing, dehydration of layered lithium titanate hydrate precursors (LTH, (Li2−xHx)Ti2O5·yH2O), leads to topotactic transformation from a C-centered orthorhombic to a body-centered orthorhombic system. Dehydrated LTH is then converted into spinel LTO nanosheets. Residual strain induced during transformation causes LTO structure distortion rendering Li-O bonding more covalent. Strongly covalent Li-O bonds screen the Li-Li Coulomb repulsion when 8a−16c cointercalation occurs, leading to large irreversible capacity loss and deteriorated cyclability. Meanwhile, rich irreversible Li intercalation degrade the power capability of LTO nanocrystals despite their high surface area. In addition to mechanism elucidation, conditions are identified to eliminate residual strain-induced structural relaxation giving rise to nanosheet anodes with superior power and highly reversible cycling performance.