Tiger Research: Driven by a Liquidity Vacuum Leading to Sharp Sell-offs, Why Has Bitcoin Failed to Rebound?

Bitcoin's sharp decline caught the market off guard. This report, authored by Tiger Research, provides an in-depth analysis of the drivers behind this sell-off and outlines potential recovery scenarios.

Key Takeaways

• Bitcoin fell from $87,000 to $81,000 on January 29th and continued to drop below the $80,000 mark.
• Microsoft's disappointing earnings report dragged down the Nasdaq, leading to a breach of Bitcoin's key realized price support near $87,000.
• Market speculation about Kevin Warsh's potential nomination as Fed Chair triggered downward pressure, although actual policy might not be as hawkish as feared.
• Regulatory sentiment towards crypto remains friendly, but with the $84,000 level lost, near-term downside risks cannot be ignored.

Bitcoin Lags in the Rebound

Bitcoin experienced two sharp declines in a short period. Around 9 AM ET on January 29th, Bitcoin began sliding from around $87,000; by 10 AM the next day, it had dropped to approximately $81,000, a decline of about 7%. The overall crypto market weakened, and investor sentiment deteriorated sharply.

This movement was not due to a single negative signal but rather a dual shock from traditional financial market turbulence and monetary policy uncertainty. The first decline was triggered by earnings shocks from major tech companies, while the second stemmed from concerns about a potential leadership change at the Federal Reserve.

A common underlying factor behind both declines is the continued contraction in trading volume across Bitcoin spot and futures markets. With low liquidity, even minor shocks can trigger excessive price volatility. Stocks and commodities rebounded quickly after brief pullbacks, but Bitcoin failed to follow suit.

Currently, the market is shunning Bitcoin. Trading volume continues to shrink, selling pressure persists, and price recovery is becoming increasingly difficult to sustain.

First Shock: AI Bubble Concerns Spill into Bitcoin

Bitcoin came under pressure starting January 29th, driven by a sharp decline in the Nasdaq index. Microsoft's Q4 earnings falling short of expectations reignited market fears about excessive froth in AI-related investments. As panic spread, investors began reducing exposure to risk assets. Bitcoin, with its inherently high volatility, experienced a particularly sharp drop.

The critical factor that made this decline especially damaging was the specific price level Bitcoin lost. During the sell-off, it breached a crucial structural support level—the Active Realized Price.

At the time, this level was around $87,000. The Active Realized Price excludes long-dormant holdings and instead calculates the average cost basis based on tokens actively circulating in the market. In other words, it represents the breakeven point for currently active traders. Once breached, most active participants simultaneously fall into a loss. Bitcoin decisively broke through this line.

Second Shock: The Warsh Effect

Around 8 PM ET on January 29th, Bitcoin experienced another sharp decline, rapidly falling from $84,000 to $81,000. Bloomberg and Reuters reported that President Trump was preparing to nominate Kevin Warsh as the next Federal Reserve Chair, with a formal announcement scheduled for January 30th.

Kevin Warsh is widely perceived by the market as a hawk. During his tenure as a Fed Governor from 2006 to 2011, he consistently opposed quantitative easing, warning of its inflationary risks. He resigned in 2011 when the Fed launched its second round of QE.

Speculation about Warsh's nomination was interpreted as conflicting with Trump's desire for rate cuts, immediately sparking concerns about tighter liquidity. Cryptocurrencies have historically performed well during periods of abundant liquidity—when investors are willing to allocate more capital to high-risk assets. The prospect of Warsh steering the Fed spread fears of liquidity tightening. In an already liquidity-starved market, investors promptly began selling.

Short-Term Correction, Medium-to-Long-Term Momentum Remains Intact

While market concerns about Warsh's hawkish reputation persist, the actual implementation of policy may not be as forceful as anticipated.

In a Wall Street Journal column, Warsh proposed a compromise approach: limited rate cuts combined with balance sheet contraction. This framework attempts to find a balance between Trump's desire for rate cuts and Warsh's inflation discipline. The implication is an overall hawkish tilt but with some flexibility on the path of interest rates.

Therefore, the total number of rate cuts might be fewer than under Powell's tenure, but a return to full-blown tightening is unlikely. Even if Warsh becomes Chair, the Fed is expected to maintain a basic direction of gradual easing.

Simultaneously, friendly crypto policies from the SEC and CFTC are gradually being implemented. Allowing cryptocurrency investments into 401(k) retirement accounts could open the floodgates to as much as $1 trillion in potential capital inflows. The rapid progress of digital asset market structure legislation is also noteworthy.

In the short term, uncertainty remains. Bitcoin is likely to continue following the ups and downs of the stock market. With the $80,000 level breached, further downside risks 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 fears, capital often rotates into alternative assets.

What remains unchanged is arguably more important. Looking at a longer time horizon, global liquidity continues to expand, and institutional policy stances towards crypto remain firm. Strategic accumulation at the institutional level continues methodically, and the Bitcoin network itself faces no operational issues. The current pullback is merely a short-term overreaction amplified by thin liquidity and does not undermine the foundation of the medium-to-long-term bullish trend.

Original link: Tiger Research