The Real Culprit Behind the Crypto Crash: The Warsh Effect

Original | Odaily (@OdailyChina)

Author｜jk

Open any crypto data platform, and all you see is a sea of red.

At the time of writing, Bitcoin (BTC) is trading at $78,214, down 6.9% in 24 hours and 12.4% over 7 days. Ethereum (ETH) is even worse, currently at $2,415, down 10.5% in 24 hours and 18.2% over 7 days. Solana (SOL) hasn't been spared either: $103.51, down 11.6% in 24 hours and 18.4% over 7 days. Looking at BNB and XRP, the declines are also in double digits.

The question is, what triggered this collective retreat?

The answer points to the same name: Kevin Warsh.

On January 30, U.S. President Donald Trump announced on the social platform Truth Social his nomination of former Federal Reserve Governor Kevin Warsh as the next Fed Chair, to succeed Jerome Powell whose term expires in May.

This news triggered a chain reaction in financial markets. Gold and silver both plummeted yesterday, with silver falling over 30%; and the cryptocurrency market officially began to bear the pressure last night. Bitcoin plunged from around $90,400 to near $81,000 around the time of the nomination, then continued to slide to the current $78,214. Daily ETF outflows approached $10 billion, triggering a chain reaction of liquidations.

On the surface, this is just a personnel appointment. But the underlying logic is far more complex. This article attempts to unravel: which market nerves does this so-called "Warsh Effect" touch? Is the crypto crash a rational prediction of monetary policy direction, or an emotionally-driven overreaction?

Who is Kevin Warsh in the "Warsh Effect"?

Before understanding the market reaction, it's necessary to first know this person, the new Fed Chair nominee.

To learn more about him, you can read this article "Estée Lauder Son-in-Law" Kevin Warsh Takes the Fed Helm, Is This Hawkish Bigwig Actually a Crypto Ally?

Kevin Warsh, 55, a Stanford graduate and Harvard Law School alumnus, previously worked in M&A at Morgan Stanley. In 2006, at the age of 35, he was appointed as a Federal Reserve Governor, making him the youngest governor in Fed history at the time. He served during the core of the 2008 global financial crisis, acting as a liaison between the Fed and financial markets, experiencing some of the most difficult monetary policy decision-making moments in history.

After leaving the Fed, Warsh moved into academia and think tanks, currently serving as a distinguished fellow at the Hoover Institution, a lecturer at Stanford Graduate School of Business, and also working at the Duquesne Family Office founded by renowned investor Stanley Druckenmiller.

His political stance is that of a monetary policy hawk. During the financial crisis, when the global economy was teetering and deflation risk was arguably greater than inflation risk, he repeatedly emphasized vigilance against inflation, even dissenting against the Fed's second round of quantitative easing (QE2). He has long criticized the Fed's post-crisis overstimulation of the economy, arguing that "large-scale asset purchases and zero interest rate policies risk distorting markets and harming long-term price stability."

This is the first alarm bell the market heard upon his nomination.

Why Did the Crypto Market Crash? Core Logic Explained

1. Liquidity Tightening

The crypto bull market has long been built on a core logic: liquidity injected by loose monetary policy is the cornerstone driving risk asset price increases. When the Fed maintains low interest rates and continuously expands its balance sheet, massive amounts of capital flow beyond traditional financial products with low fixed-income returns: into stocks, real estate, and cryptocurrencies.

Warsh's hawkish reputation points in the opposite direction. He leans towards tightening monetary policy, shrinking the Fed's balance sheet, and maintaining higher real interest rates. In such a macro environment, capital flows back to safe assets, risk appetite declines, and cryptocurrencies will be the first to bear the brunt.

Markus Thielen, founder of 10x Research, summarized this precisely: The market generally believes that Warsh's emphasis on monetary discipline and preference for higher real interest rates will reclassify cryptocurrencies from a "hedge against dollar devaluation" to a "speculative bubble that recedes when liquidity dries up."

2. ETF Inflow Reversal

The transmission mechanism of this crash at the technical level is particularly noteworthy. After the Warsh nomination news landed, U.S.-listed spot Bitcoin and Ethereum ETFs experienced nearly $10 billion in net outflows in a single trading day. This figure alone is enough to create shock, but its ripple effects are even more significant.

ETF outflows trigger price declines, which in turn hit the stop-loss levels of the market's numerous leveraged positions. This is a classic vicious cycle mechanism: selling pressure from forced liquidations further drives down prices, triggering more liquidations, forming a self-reinforcing loop. After Bitcoin's key support around $85,000 (near the 100-week simple moving average) was breached, this cascading effect accelerated sharply, with prices sliding to around $81,000 and now further down to $78,214.

The impact of this liquidation is not uniform across assets. As the situation evolved, L1 tokens other than Bitcoin generally fell more than BTC. Ethereum is down 18.2% over 7 days, Solana down 18.4%, XRP also down 15.5%, all significantly exceeding Bitcoin's 12.4% decline. This structural differentiation has a clear logical explanation: Bitcoin, due to the widespread adoption of ETF products, has relatively deeper institutional liquidity and more robust price support mechanisms; while ETH, SOL, and other L1 tokens trade more on leverage positions on crypto-native platforms, making them more vulnerable to liquidation cascades when liquidity dries up. For projects on the Solana ecosystem, SOL's own 18.4% drop means direct impacts on on-chain activity and transaction volume.

Meanwhile, looking at the overall ETF inflow trend for 2026, there has been a net outflow of approximately $32 million so far, forming a stark contrast with the combined inflow of over $35 billion in 2024 and 2025.

3. Squeeze on Risk Assets from Rising Real Interest Rates

When real interest rates (the "real" cost of borrowing after subtracting inflation from nominal rates) rise, the cost of holding high-risk assets becomes apparent. Traditional assets offer higher yields, prompting capital to retreat from crypto assets like Bitcoin towards bonds and other safer allocations.

Warsh's consistent stance on "higher real interest rates" directly threatens the pricing foundation of this market. A large number of leveraged positions in the crypto market rely on low-cost borrowing to sustain themselves; rising real interest rates mean soaring leverage costs and increased pressure on positions.

But His Attitude Towards Bitcoin is Far More Complex Than the Market Predicts

The crypto market crash is primarily driven by concerns over the direction of macro monetary policy—this is an undeniable fact. However, if we only use "hawkish monetary policy" to fully characterize Warsh's attitude towards the crypto space, we would miss a very important dimension: he actually holds an unusually constructive view of Bitcoin itself.

In a 2025 Hoover Institution interview, Warsh explicitly stated: "Bitcoin doesn't make me nervous... I see it as an important asset that helps policymakers judge whether they're doing the right thing or the wrong thing." He characterized Bitcoin as a "good cop" for policymaking—its price volatility can reflect signals of the Fed's mistakes in inflation management and monetary policy execution.

Going further, Warsh framed the cryptocurrency industry as a matter of national economic competitiveness. He emphasized that the main hubs for Bitcoin and cryptocurrency software development are in the United States, implying that the U.S. has a strategic interest in maintaining its leadership in this field. He has also personally invested in crypto startups.

Confirmation Hearing and Future Policy Direction

For now, Warsh has not officially taken office. His appointment still needs to go through the U.S. Senate confirmation process. Senator Thom Tillis has publicly stated he will block confirmation of any Fed Chair nominee until an investigation into the Fed building renovation issue is completed. This means the entire confirmation process could be fraught with uncertainty.

More crucially, even if Warsh ultimately assumes the role, he cannot single-handedly control monetary policy. Fed interest rate decisions are made by a vote of the entire FOMC (Federal Open Market Committee); Warsh would be just one of twelve votes. Currently, a majority of FOMC members have explicitly stated they are unwilling to continue cutting rates without more solid evidence that inflation is steadily returning to the 2% target. The December dot plot shows only one rate cut projected for 2026 and another for 2027.

This means that regardless of Warsh's personal inclinations, actual monetary policy actions will depend on the consensus of the entire committee—and that consensus currently remains cautious.

Outlook for the Crypto Market

Overall, the current crypto market reaction to Warsh's nomination contains two distinct narratives:

Bearish Narrative (Mainstream Market Reaction): The "Warsh Effect" means tighter monetary policy, higher real interest rates, and a smaller Fed balance sheet. This directly compresses the liquidity environment on which cryptocurrencies depend. Current market data already reflects this impact—BTC at $78,214 is down approximately 13.5% from the pre-nomination level of $90,400; and Solana, with an 18.4% 7-day decline, is at the forefront of the drop list. For Solana ecosystem projects, DeFi protocols, and token issuance activities that rely on low-cost leverage, this is a tangible structural risk signal.

Bullish Narrative (Some Community Voices): The "Warsh Effect" holds a positive view of Bitcoin itself, the Trump administration overall remains inclined to support the crypto industry, and Warsh has recently hinted he is willing to greenlight rate cuts under conditions of productivity gains. Not to mention, he cannot single-handedly determine the direction of interest rates.

The truly noteworthy event will be the Senate confirmation hearing: there, Warsh will be questioned on his specific stances regarding monetary policy, crypto regulation, and CBDCs. The direction of that hearing may do more to determine the fate of the crypto industry in the coming months than any market speculation today.

For projects currently driving community growth and token ecosystem development, the most immediate practical significance of the "Warsh Effect" is this: the macro liquidity environment is entering a period of uncertainty. Short-term sentiment volatility has already occurred, but the real policy impact is still on the way.