Liquidity Crisis Plunge: Why Did Only Bitcoin Fail to Recover?

Original Title: Liquidity Vacuum Drives Sharp Sell-Off: Why Only Bitcoin Failed to Recover

Original Source: Tiger Research

The sharp decline of Bitcoin caught the market off guard. This report, written by Tiger Research, provides an in-depth analysis of the driving factors behind this sell-off and outlines potential recovery scenarios.

Key Points Summary

· Bitcoin dropped from $87,000 to $81,000 on January 29 and continued to fall below $80,000. (Rhythmic Note: Bitcoin has now dropped below $75,000 this morning)

· Disappointing earnings from Microsoft dragged down the Nasdaq index, breaking through the active price support near $87,000 for Bitcoin.

· Speculation about Kevin Wash being nominated as the Fed chair triggered downward pressure, even though actual policy may not be as harsh as the market expected.

· Regulatory agencies remain friendly towards cryptocurrency, but the breach of $84,000 has occurred, and downside risks should not be ignored in the short term.

Bitcoin Lagging in Rebound

Bitcoin experienced two sharp declines in a short period of time. Around 9 AM EST on January 29, Bitcoin started to slide from around $87,000; by the next day at 10 AM, it had dropped to about $81,000, a 7% drop. The overall crypto market was weak, and investor sentiment deteriorated sharply.

This trend was not driven by a single negative signal but by a dual impact of shocks from the traditional financial markets and currency policy uncertainty. The trigger for the first round of decline was the impact of large tech companies' earnings, and the second round stemmed from concerns about the leadership change at the Fed.

Behind the two rounds of decline is a common underlying reason: the continuous shrinkage of trading volume in the Bitcoin spot and futures markets. Under poor liquidity, even minor shocks are enough to trigger excessive price volatility. Stocks and commodities quickly rebounded after a brief downturn, but Bitcoin failed to follow suit.

Currently, the market is avoiding Bitcoin. With ongoing shrinking trading volume and constant selling pressure, the price's rebound is increasingly difficult to sustain.

First Impact: AI Bubble Concern Spills Over to Bitcoin

Bitcoin came under pressure on January 29, with a key factor being the sharp drop in the Nasdaq index. Microsoft's fourth-quarter earnings report falling below expectations once again reignited concerns in the market about overinflated AI-related investments. Amid spreading panic, investors began reducing their positions in risk assets. Bitcoin, known for its high volatility, experienced a particularly sharp decline.

What made this decline especially devastating was the key price level that Bitcoin breached. During the downturn, it broke through an important structural support—the Realized Cap.

At that time, this level was held around $87,000. The Realized Cap excludes long-held idle coins and instead calculates the average cost based on coins actively circulating in the market. In other words, it is the breakeven point for current active traders. Once breached, most active participants are simultaneously in a loss position. Bitcoin boldly broke below this line.

Second Impact: Powell Effect

Around 8 p.m. on January 29, Bitcoin sharply dropped again, plummeting from $84,000 to $81,000 rapidly. Bloomberg and Reuters reported that President Trump was preparing to nominate Kevin Warsh as the next Federal Reserve Chair, with the official announcement scheduled for January 30.

Kevin Warsh is widely seen in the market as a hawkish figure. During his tenure as a Fed governor from 2006 to 2011, he consistently opposed quantitative easing policies, warning of the inflation risks they posed. When the Fed launched the second round of quantitative easing in 2011, Warsh promptly resigned.

Speculation about Warsh's nomination was interpreted as conflicting with Trump's interest in rate cuts, prompting concerns in the market about liquidity tightening. Cryptocurrencies have historically performed well in periods of ample liquidity—times when investors are willing to allocate more funds to high-risk assets. Warsh potentially leading the Fed fueled fears of liquidity tightening. In a market already facing tight liquidity, investors quickly engaged in selling.

Short-Term Correction, Strong Medium- to Long-Term Momentum

Concerns persist in the market about Warsh's hawkish reputation, yet the actual policy implementation may not be as tough as expected.

In a Wall Street Journal column, Warsh proposed a middle-ground approach: limited rate cuts combined with balance sheet contraction. This framework aims to find a balance point between Trump's interest in rate cuts and Warsh's inflation discipline. The implication is that there is still an overall hawkish inclination, but some flexibility in interest rate trends is retained.

Therefore, the total number of rate cuts may be fewer than during Powell's tenure, but the likelihood of a full-scale return to tightening is slim. Even if Brainard assumes the chair, the Fed is expected to maintain its gradualist easing bias.

Meanwhile, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission are gradually implementing crypto-friendly policies. Allowing cryptocurrency investments in 401(k) retirement accounts could open the market to inflows of up to $1 trillion. The rapid advancement of digital asset market structure legislation is also noteworthy.

In the short term, uncertainty persists. Bitcoin is likely to continue following the ebbs and flows of the stock market. With the breach of $80,000, further downside risk cannot be ruled out. However, once the stock market enters a consolidation phase, Bitcoin may once again become a favored alternative investment. Historically, whenever tech stocks stall due to bubble concerns, funds tend to rotate into alternative assets.

What remains truly unchanged is what truly matters. Taking a longer-term view, global liquidity continues to expand, institutional policy stances toward crypto remain firm, strategic institutional accumulation is still progressing orderly, and the Bitcoin network itself has not faced any operational issues. The current pullback is merely a short-term overreaction induced by thin liquidity and does not undermine the fundamental bullish trend in the medium to long term.

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