Crypto Market Macro Research Report: Under the Warsh Effect, as the Tightening Cycle Approaches, How Will Crypto Assets Be Priced?

Chapter 1: Decoding the Warsh Effect – Why Did a Personnel Appointment Trigger a Market Earthquake?

On January 30, 2026, a personnel appointment sent shockwaves through global financial markets, its impact even surpassing the release of most economic data and monetary policy adjustments. The news that former Federal Reserve Governor Kevin Warsh was nominated as the next Fed Chair caused the US Dollar Index to surge violently, gold and silver to flash crash, and the cryptocurrency market to experience a bloody massacre—Bitcoin fell approximately 7% in a single day, Ethereum plummeted over 10%, and the entire market's value evaporated by more than $800 billion. On the surface, this appeared to be a routine personnel change, but deeper analysis reveals that the market's extreme reaction stemmed from the fact that the nomination of this specific individual, Warsh, touched the most sensitive nerve in the current financial system. Kevin Warsh is no ordinary Fed official; his career trajectory and policy stances paint a complete portrait of a hawk. In 2006, at just 35 years old, Warsh became the youngest governor in Federal Reserve history, an appointment that itself signaled his extraordinary potential. During the turbulent waves of the 2008 global financial crisis, when most of his colleagues advocated for aggressive quantitative easing policies to rescue the collapsing financial system, Warsh emerged as the most steadfast dissenter. He not only publicly opposed the second round of quantitative easing (QE2) but also repeatedly warned in post-crisis reflections that large-scale asset purchases and prolonged zero-interest-rate policies were distorting market signals, creating moral hazard, and undermining long-term price stability. These views seemed out of place amidst the crisis atmosphere at the time, but as time passed, more and more people began to re-examine his warnings. After leaving the Fed, Warsh further refined his theoretical framework through academic work at the Hoover Institution and Stanford Graduate School of Business. He particularly emphasized the importance of the "real interest rate" as an anchor for monetary policy, arguing that negative real rates punish savers and encourage capital misallocation. In a public speech in 2025, he explicitly stated: "A healthy economy requires a positive real interest rate as a signaling mechanism for resource allocation; artificially suppressed rates only create false prosperity and inevitable bubble bursts." These statements stand in direct and sharp opposition to the liquidity environment upon which the current crypto market thrives.

The most profound revelation of the Warsh Effect lies in its exposure of a long-overlooked contradictory relationship between the crypto market and monetary policy. The original narrative of cryptocurrency was built on resisting central bank money printing, as clearly indicated by Satoshi Nakamoto's message in the Bitcoin genesis block: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." However, as the crypto market matured, it did not evolve into a parallel financial system completely independent of the traditional system as early idealists had hoped. Instead, it became increasingly integrated into the existing system, developing a structural dependence on it. The approval of Bitcoin spot ETFs was a milestone in this process: it opened the door for institutional capital to enter the crypto market, but it also meant that the pricing power of crypto assets shifted from decentralized communities to Wall Street trading desks. Today, Bitcoin's price is not determined by miners, holders, or developers, but by the asset allocation models and risk management systems of BlackRock and Fidelity. These models naturally categorize crypto assets as "high-growth tech stocks" or "alternative risk assets," with their buy/sell decisions based on the same macro variables as traditional assets—interest rate expectations, liquidity conditions, risk appetite. This structural dependence makes the crypto market exceptionally vulnerable to hawkish figures like Warsh, because institutional investors mechanically adjust their positions based on interest rate expectations, without considering Bitcoin's "non-sovereign store of value" narrative. This is a cruel irony: an asset born to resist central banks ultimately has its price determined by traditional institutions most sensitive to central bank policy.

Chapter 2: Historical Backtesting of Tightening Cycles – How Are Crypto Assets Priced?

To truly understand the potential far-reaching impact of the Warsh Effect, we need to look back at history and examine the performance patterns of crypto assets during past tightening cycles. This historical backtesting is not a simple data dump but an attempt to extract structural patterns from past price fluctuations, providing a reference framework for judging the possible direction of the current market. The first period worthy of in-depth analysis is the 2017-2018 balance sheet reduction and rate hike cycle. The Fed officially began reducing its balance sheet in October 2017 and raised rates seven times cumulatively over the next two years. Bitcoin's performance during this cycle showed a clear lagging characteristic: in December 2017, when the Fed had already begun its rate hike process, Bitcoin instead hit a then all-time high of $19,891, with the market completely ignoring signals of monetary policy tightening and continuing to revel in a frenzied bull market atmosphere. However, this disregard ultimately came at a painful cost. As rate hikes accelerated and balance sheet reduction expanded in 2018, the persistent contraction of liquidity eventually overwhelmed the market. Bitcoin entered a bear market lasting 13 months, falling to a low of $3,127, a drop of 84.3%. The lesson from this period is profound: the impact of monetary policy takes time to accumulate. Markets may ignore tightening signals in the short term, but once a tipping point is reached, the adjustment is often violent and painful. More importantly, the 2017-2018 cycle also revealed an early characteristic of the crypto market—its correlation with traditional financial markets was relatively weak, driven more by its own cycles (like Bitcoin halvings) and retail sentiment.

The second key period is the 2021-2022 inflation response cycle, which has higher comparability to the current environment. The Fed began tapering asset purchases in November 2021, raised rates for the first time in March 2022, and raised rates seven times cumulatively that year by a total of 425 basis points. Bitcoin, after peaking at $69,000 in November 2021, fell to a low of $15,480 in November 2022, a drop of about 77%. Compared to the 2017-2018 cycle, the most important change during this period was the significant strengthening of the correlation between the crypto market and tech stocks. Data shows that the 120-day rolling correlation between Bitcoin and the Nasdaq index soared from around 0.3 in early 2021 to 0.86 by mid-2022. This sharp rise in correlation was not accidental; it reflected a structural change in the crypto market: the massive entry of institutional investors, who managed crypto assets within a unified risk asset framework. When the Fed began aggressive rate hikes to combat inflation, institutional investors simultaneously reduced positions in tech stocks and crypto assets according to their risk models, creating a vicious cycle of "multi-asset liquidation." Another important phenomenon emerged during this period: severe internal divergence within the crypto market. Amid the overall decline, Bitcoin's performance was relatively resilient, while most altcoins fell much deeper, with many tokens dropping over 90%. This divergence signaled the market beginning to distinguish between "core assets" and "peripheral assets," with capital concentrating towards assets with better liquidity and stronger consensus.

The third period is the high-rate maintenance phase of 2024-2025, the most recent and most relevant for reference. The Fed maintained the federal funds rate in the 5.25%-5.50% range for 16 months while continuing to reduce its balance sheet at a pace of $95 billion per month. During this period, the crypto market exhibited complex structural characteristics. On one hand, Bitcoin benefited from spot ETF approvals to achieve a significant rally, rising from $45,000 to over $100,000; on the other hand, most altcoins fell 40-70%, with over 80% of the top 100 tokens by market cap underperforming Bitcoin. This divergence reveals an important trend: in an environment of overall tightening liquidity, capital concentrates towards the "safest risk assets," i.e., those with the best liquidity, highest institutional acceptance, and lowest regulatory risk. For other crypto assets, they face not only the contraction of macro liquidity but also a "siphoning effect" from Bitcoin. Another noteworthy phenomenon during this period was that changes in real interest rates began to directly affect crypto asset pricing. When the 10-year Treasury Inflation-Protected Securities (TIPS) yield rose from 1.5% to 2.5%, Bitcoin's price fell by about 15%, a sensitivity not clearly evident in previous cycles.

Based on the experience of these three historical periods, we can summarize several key patterns of the crypto market during tightening cycles. First, the impact of monetary policy has cumulative and lagging effects; markets may ignore tightening signals initially but eventually react with violent adjustments. Second, as institutional participation increases, the correlation between the crypto market and traditional risk assets continues to strengthen, reaching extremes in tightening environments. Third, severe internal divergence occurs within the market, with capital concentrating towards top assets, highlighting the Matthew effect. Fourth, accumulated leverage amplifies the magnitude and speed of declines, forming a vicious cycle of "price drop - triggers liquidation - further price drop." Fifth, changes in real interest rates are increasingly becoming a core variable affecting crypto pricing; rising risk-free rates directly increase the opportunity cost of holding crypto assets. The peculiarity of the Warsh Effect lies in its occurrence at the moment of the crypto market's highest degree of institutionalization and at a time of relatively high market valuation. The combination of these two factors may make this adjustment more complex and prolonged than any previous one. Furthermore, as a hawk with a complete theoretical framework and consistent stance, Warsh's nomination may signal that tight policy is not a temporary response but a long-term policy paradigm. The impact of such a paradigm shift would far exceed that of cyclical policy adjustments.

Chapter 3: Crypto Market Pricing Models Under Tightening Cycles

In the new environment initiated by the Warsh Effect, traditional crypto asset pricing models have become ineffective, necessitating the establishment of a new analytical framework to understand market dynamics. Based on historical data and current market structure, we have constructed a three-factor pricing model to explain the price formation mechanism of crypto assets during tightening cycles. The first factor is liquidity conditions, with a weight set at 40%. This factor measures the trend of global money supply changes, including indicators such as the Fed's balance sheet size, global M2 growth rate, and overnight reverse repo volume. Data shows a strong correlation (R² = 0.62) between global liquidity changes and crypto market capitalization; for every 1% contraction in liquidity, the total crypto market cap declines by an average of 2.1%. Under the policy framework Warsh might implement, we estimate the Fed's balance sheet could shrink by 15-20% over the next two years, equivalent to approximately $1.2-$1.6 trillion. According to the model, this alone could cause the total crypto market cap to contract by 25-30%. More importantly, liquidity contraction often exhibits non-linear characteristics: the initial impact is limited, but once contraction accumulates to a certain level, it can trigger a positive feedback loop of a liquidity crisis. The current leverage structure in the crypto market amplifies this vulnerability, as a large number of collateralized loans and derivative positions face liquidation pressure when liquidity tightens, further exacerbating market declines.

The second factor is the real interest rate, with a weight set at 35%. This factor measures the opportunity cost of holding crypto assets, with core indicators being the 10-year Treasury Inflation-Protected Securities (TIPS) yield and the real federal funds rate. For every 1 percentage point increase in the real interest rate, the risk premium required for Bitcoin must increase by 280 basis points to maintain its current valuation. This means if the real rate rises from the current 1.5% to the 3% Warsh might advocate, Bitcoin's expected annualized return would need to increase from its historical average of about 60% to nearly 70%, a significantly high threshold.

The third factor is risk appetite, with a weight set at 25%. This factor measures market participants' willingness to take on risk, with core indicators including the VIX fear index, high-yield bond spreads, and tech stock valuation premiums. The crypto market is extremely sensitive to changes in risk appetite, with an elasticity coefficient of 1.8, meaning that when overall market risk appetite declines by 10%, crypto market valuations could fall by 18%. This disproportionate amplification effect stems from the high volatility and peripheral status of crypto assets: during optimistic markets, investors are willing to take higher risks for potential returns; during pessimistic markets, crypto assets are often the first to be sold. In tightening cycles, risk appetite typically declines systematically because high-interest-rate environments inherently discourage risk-taking. Rising real rates not only change the absolute valuation of assets but also alter investors' risk tolerance: when risk-free assets offer substantial returns, investors no longer need to take excessive risks in pursuit of returns. This psychological shift manifests in multiple dimensions: slowing venture capital investment, compressed growth stock valuations, widening high-yield bond spreads. As one of the most risk-appetite-sensitive sectors, the crypto market naturally suffers the greatest impact.

Within this three-factor model framework, different categories of crypto assets exhibit differentiated pricing characteristics. As the market benchmark, Bitcoin's price movements can be explained 60% by macro liquidity factors, 25% by ETF flows, with the influence of on-chain fundamentals now below 15%. This structural change implies Bitcoin's correlation with traditional risk assets will remain high at 0.65-0.75, with annualized volatility staying in the 55-70% range, and sensitivity to real interest rates reaching 12-15% inverse price movement for every 1% change. Smart contract platform tokens like Ethereum exhibit a more complex pricing logic: network revenue accounts for 40%, developer activity 25%, DeFi Total Value Locked (TVL) 20%, and macro factors 15%. This combination means Ethereum has some fundamental support yet cannot completely escape macro influences. More importantly, smart contract platforms have complex interconnections; the failure of one protocol can spread through asset linkages and sentiment contagion to the entire ecosystem, creating systemic risk. The divergence among application-layer tokens and governance tokens will be most severe: tokens with genuine cash flow (annual protocol fees exceeding $50 million) may receive valuation support, while pure governance tokens may face liquidity drying up. Data shows that among the top 200 tokens by market cap, less than 30% have annual protocol revenue exceeding $10 million, and only about 15% have sustainable dividend or buyback mechanisms. In a tightening cycle, capital will increasingly concentrate in a few high-quality assets, with most tokens potentially falling into a "zombie state."

Chapter 4: Investment Strategy Adjustments and Risk Management

Facing the tightening environment initiated by the Warsh Effect, all market participants need to fundamentally adjust their strategic frameworks and risk management approaches. For traditional institutional investors, the first step is to redefine the role and positioning of crypto assets within their portfolios. Bitcoin should no longer be viewed as "digital gold" or an inflation hedge but explicitly defined as a "high-beta growth asset," categorized under the same risk factor as tech stocks. This reclassification has practical operational significance: in asset allocation models, the risk budget for crypto assets needs to be adjusted accordingly, reduced from 5-8% of total portfolio risk to 3-5%; in performance evaluation, the benchmark should shift from gold or commodity indices to tech stock indices; in risk management, stress test scenarios need to include extreme situations like "liquidity shocks" and "correlation spikes." Institutional investors also need to establish more systematic decision-making processes, making dynamic adjustments based on macro signals (real interest rates, liquidity indicators, risk appetite) rather than relying on long-term holding belief-based investing. Specifically, clear trigger conditions can be set: automatically reducing positions when real interest rates breach a certain threshold, initiating hedging when liquidity indicators deteriorate to a specific level, and gradually adding positions when risk appetite falls to historical lows. Hedging strategies become crucial, considering the use of Bitcoin futures, options, or correlation trades to manage downside risk. It is particularly important to note that during tightening cycles, the correlation between crypto assets and traditional assets may further strengthen, reducing their diversification value within a portfolio. This change needs to be accurately reflected in risk models and allocation ratios adjusted promptly.

Looking ahead, regardless of the final outcome of the Warsh nomination, the crypto market has entered a new, irreversible phase. The core characteristic of this phase is the deep integration of crypto assets with the traditional financial system, and the resulting fundamental changes in pricing mechanisms, volatility patterns, and correlations. Regulatory frameworks will gradually clarify, valuation methods will professionalize, market structure will become more complex, and cyclical characteristics will weaken. From a broader perspective, the Warsh Effect may ultimately prompt the necessary self-innovation within the crypto industry. When the liquidity红利 disappears, the market will be forced to return to its essence: creating real value, solving real problems, and building sustainable economic models. Projects reliant on speculation and narrative without substantive progress will be eliminated, while truly innovative protocols will gain room for development.