The incorporation of nanostructured carbon has been recently reported as an effective approach to improve the cycling stability when Si is used as high-capacity anodes for the next generation Li-ion battery. However, the mechanism of such notable improvement remains unclear. Herein, we report in-situ transmission electron microscopy (TEM) studies to directly observe the dynamic electrochemical lithiation/delithiation processes of crumpled graphene-encapsulated Si nanoparticles to understand their physical and chemical transformations. Unexpectedly, in the first lithiation process, crystalline Si nanoparticles undergo an isotropic to anisotropic transition, which is not observed in pure crystalline and amorphous Si nanoparticles. Such a surprising phenomenon arises from the uniformly distributed localized voltage around the Si nanoparticles due to the highly conductive graphene sheets. It is observed that the intimate contact between graphene and Si is maintained during volume expansion/contraction. Electrochemical sintering process where small Si nanoparticles react and merge together to form large agglomerates following spikes in localized electric current is another problem for batteries. In-situ TEM shows that graphene sheets help maintain the capacity even in the course of electrochemical sintering. Such in-situ TEM observations provide valuable phenomenological insights into electrochemical phenomena, which may help optimize the configuration for further improved performance.