Original | Odaily Planet Daily (@OdailyChina)

Author | jk

Open any cryptocurrency data platform, and what you see is a sea of blood red.

As of the time of writing, Bitcoin (BTC) is priced at $78,214, with a 24-hour drop of 6.9% and a 7-day drop of 12.4%. Ethereum (ETH) is faring even worse, currently priced at $2,415, down 10.5% in 24 hours and 18.2% over the past week. Solana (SOL) is also not spared: $103.51, down 11.6% in 24 hours and 18.4% over the past week. Looking at BNB and XRP, both have double-digit declines.

The question is, what triggered this round of collective retreat?

The answer points to one name: Kevin Warsh.

On January 30, U.S. President Donald Trump announced on the social platform Truth Social that he nominated former Federal Reserve Governor Kevin Warsh as the next Federal Reserve Chair, to replace Jerome Powell, whose term will end in May.

This news triggered a chain reaction in the financial markets. Gold and silver both plummeted yesterday, with silver dropping over 30%; meanwhile, the cryptocurrency market began to officially bear the pressure last night. Bitcoin fell sharply from around $90,400 to about $81,000 around the time of the announcement, and then continued to decline to the current $78,214. The single-day ETF outflow approached $1 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 sort out: what market nerves did this so-called "Warsh Effect" actually touch? Is the cryptocurrency crash a rational prediction of the direction of monetary policy, or an emotionally driven overreaction?

Who is Kevin Warsh in the Warsh Effect?

Before understanding the market reaction, it is necessary to get to know this person, the new Federal Reserve Chair.

To learn more about him, you can read this article “The ‘Estee Lauder Prince’ Kevin Warsh Takes Charge of the Federal Reserve, Hawkish Bigwig Turns Out to Be a Crypto Ally?”

Kevin Warsh, 55, graduated from Stanford University and is a Harvard Law School alumnus. He previously worked at Morgan Stanley in mergers and acquisitions. In 2006, at the age of 35, he was appointed as a Federal Reserve Governor, making him the youngest governor in the history of the Federal Reserve at that time. He held this position during the core period of the 2008 global financial crisis, serving as a bridge between the Federal Reserve and the financial markets, experiencing some of the most challenging moments in monetary policy decision-making.

After leaving the Federal Reserve, Warsh transitioned to academia and think tanks, currently serving as a distinguished fellow at the Hoover Institution and a lecturer at Stanford Business School, while also working at the Duquesne Family Office founded by renowned investor Stanley Druckenmiller.

His political background is that of a monetary policy hawk. During the financial crisis, when the global economy was on the brink and deflation risks were even greater than inflation risks, he repeatedly emphasized vigilance against inflation, even voting against the Federal Reserve's second round of quantitative easing (QE2). He has long criticized the Federal Reserve's excessive economic stimulus after the financial crisis, arguing that "massive asset purchases and zero interest rate policies risk distorting markets and harming long-term price stability."

This was the first alarm signal the market triggered upon hearing of his nomination.

Why did the crypto market crash? Core logic breakdown

1. Liquidity Tightening

The bull market in the cryptocurrency market has long been built on one core logic: the liquidity injected by loose monetary policy is the cornerstone driving up the prices of risk assets. When the Federal Reserve maintains low interest rates and continues to expand its balance sheet, massive funds flow into traditional financial products with low fixed-income returns: stocks, real estate, and cryptocurrencies.

Warsh's hawkish reputation implies a completely opposite direction. He tends to tighten monetary policy, reduce the Federal Reserve's balance sheet, and maintain higher real interest rates. In such a macro environment, funds will flow back to safe assets, risk appetite will decline, and cryptocurrencies will be the first to bear the brunt.

Markus Thielen, founder of 10x Research, accurately summarized this: the market generally believes that Warsh's emphasis on monetary discipline and preference for higher real interest rates will reclassify cryptocurrencies from "hedging tools against dollar depreciation" to "speculative bubbles that will fade during liquidity droughts."

2. ETF Inflow Reversal

The technical transmission mechanism of this crash is particularly noteworthy. After the announcement of Warsh's nomination, U.S.-listed spot Bitcoin and Ethereum ETFs experienced nearly $1 billion in net outflows in a single trading day. This figure alone is enough to create an impact, but its chain reaction is even more significant.

ETF outflows trigger price declines, and price declines then hit the stop-loss lines of many leveraged positions in the market. This is a classic vicious cycle mechanism: the selling pressure generated by forced liquidations further lowers prices, which in turn triggers more liquidations, forming a self-reinforcing cycle. After Bitcoin broke through the key support around $85,000 (near the 100-week simple moving average), this cascading effect accelerated sharply, with prices sliding to around $81,000, and now further down to $78,214.

This liquidation does not impact different assets evenly. During the evolution of the situation, the decline of L1 tokens other than Bitcoin has generally exceeded that of BTC. Ethereum's 7-day drop is 18.2%, Solana's is 18.4%, and XRP's is as high as 15.5%, all significantly exceeding Bitcoin's 12.4%. This structural differentiation has a clear logical explanation: Bitcoin, due to the widespread availability of ETF products, has relatively deeper institutional liquidity and a more robust price support mechanism; while trading of L1 tokens like ETH and SOL relies more on leveraged positions on crypto-native platforms, making them more susceptible to cascading liquidations during liquidity droughts. For projects in the Solana ecosystem, the 18.4% drop in SOL itself means that on-chain activity and trading volume will face direct impacts.

At the same time, looking at the overall ETF inflow trend for 2026, there has already been a net outflow of about $32 million, in stark contrast to the over $35 billion inflow in 2024 and 2025 combined.

3. Rising Real Interest Rates Squeeze Risk Assets

When real interest rates (the "real" borrowing cost after nominal rates are adjusted for inflation) rise, the cost of holding high-risk assets becomes evident. Traditional assets offer higher yields, leading funds to withdraw from cryptocurrencies like Bitcoin and shift towards bonds and other safer allocations.

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

But his attitude towards Bitcoin is far more complex than the market anticipates.

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

In a 2025 interview with the Hoover Institution, Warsh clearly stated: “Bitcoin doesn’t make me nervous… I see it as an important asset that can help policymakers determine whether they are doing the right thing or the wrong thing.” He characterizes Bitcoin as a "good cop" in policy-making—its price fluctuations can reflect signals of the Federal Reserve's missteps in inflation management and monetary policy execution.

Furthermore, Warsh characterizes the cryptocurrency industry as a national economic competitiveness issue. He emphasizes that the main hubs for Bitcoin and cryptocurrency software development are in the U.S., implying that it is strategically significant for the U.S. to maintain its leading position in this field. He has also invested in crypto startup projects.

Confirmation Hearings and Future Policy Direction

At present, Warsh has not yet officially taken office. His appointment still needs to go through the confirmation process in the U.S. Senate. Senator Thom Tillis has publicly stated that he will block the confirmation of any Federal Reserve Chair nominee until the investigation into the Federal Reserve building renovation issue is completed. This means the entire confirmation process may be full of variables.

More critically, even if Warsh ultimately takes office, he cannot single-handedly control monetary policy. The Federal Reserve's interest rate decisions are made by a vote of the FOMC (Federal Open Market Committee), and Warsh is just one of twelve votes. Currently, a majority of FOMC members have clearly stated that they are unwilling to continue cutting rates until there is more substantial evidence that inflation is stabilizing back to the 2% target. The dot plot for December indicates only one expected rate cut in 2026 and another in 2027.

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

Outlook for the Crypto Market

In summary, the current response of the crypto market to Warsh's nomination presents two distinctly different narratives:

Bearish Narrative (Mainstream Market Reaction): The “Warsh Effect” implies tighter monetary policy, higher real interest rates, and a smaller Federal Reserve balance sheet. This directly compresses the liquidity environment on which cryptocurrencies rely for survival. Current market data already reflects this impact—BTC is currently priced at $78,214, having accumulated a drop of about 13.5% from the pre-nomination price of $90,400; while Solana, with a 7-day drop of 18.4%, ranks among the top decliners, representing a tangible structural risk signal for Solana ecosystem projects, DeFi protocols, and token issuance activities that rely on low-cost leverage.

Bullish Narrative (Voices from the Community): The “Warsh Effect” holds a positive attitude towards Bitcoin itself, the Trump administration still generally leans towards supporting the crypto industry, and Warsh has recently hinted that he is willing to greenlight rate cuts under conditions of increased productivity. Not to mention, he cannot unilaterally decide the direction of interest rates.

The truly noteworthy point will be the Senate confirmation hearing: at that time, Warsh will be questioned about his specific positions on monetary policy, crypto regulation, and CBDCs. The direction of this hearing may determine the fate of the crypto industry in the coming months more than any current market speculation.

For projects that are driving community growth and token ecosystem development, the most significant practical implication of the “Warsh Effect” at present is that the macro liquidity environment is entering a period of uncertainty. Short-term emotional fluctuations have already occurred, but the real policy impacts are still on the way.

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