The sharp decline in Bitcoin has caught the market off guard. This report, written by Tiger Research, delves into the driving factors behind this sell-off and outlines potential recovery scenarios.

Key Summary

• Bitcoin fell from $87,000 to $81,000 on January 29, continuing to drop below $80,000.
• Microsoft's disappointing earnings report weighed down the Nasdaq index, causing the active realized price support around $87,000 for Bitcoin to be breached.
• Market speculation regarding Kevin Warsh's nomination as Federal Reserve Chair exerted downward pressure, although actual policy may not be as severe as the market anticipates.
• Regulators remain friendly towards cryptocurrencies, but the loss of the $84,000 level cannot be ignored, and short-term downside risks are significant.

Bitcoin Lags in Recovery

Bitcoin has experienced two sharp declines in a short period. Around 9 AM EST on January 29, Bitcoin began to slide from around $87,000; by 10 AM the next day, it had dropped to approximately $81,000, a decline of about 7%. The overall weakness in the crypto market led to a sharp deterioration in investor sentiment.

This trend is not due to a single negative signal but rather a dual impact from shocks in traditional financial markets and uncertainty in monetary policy. The first round of declines was triggered by the earnings reports of major tech companies, while the second round stemmed from concerns over changes in the Federal Reserve's leadership.

A common underlying reason for both rounds of declines is the continued shrinkage in trading volume in the Bitcoin spot and futures markets. In a low liquidity environment, even minor shocks can trigger excessive price volatility. While stocks and commodities quickly rebounded after a brief downturn, Bitcoin failed to follow suit.

Currently, the market is avoiding Bitcoin. Trading volume continues to shrink, and selling pressure persists, making price rebounds increasingly difficult to sustain.

First Shock: AI Bubble Concerns Spill Over to Bitcoin

Bitcoin began to feel pressure on January 29, primarily due to the sharp decline in the Nasdaq index. Microsoft's fourth-quarter earnings report fell short of expectations, reigniting market concerns about the excessive bubble in AI-related investments. Amid spreading panic, investors began to reduce their positions in risk assets. Bitcoin, known for its high volatility, experienced particularly severe declines.

The reason this drop was especially lethal lies in the price level that Bitcoin breached. During the downturn, it broke through an important structural support—the active realized price.

At that time, this level was maintained around $87,000. The active realized price excludes long-term dormant positions and recalculates the average cost based on tokens actively circulating in the market. In other words, it serves as the breakeven point for currently trading investors. Once breached, most active participants found themselves in a loss position. Bitcoin decisively broke through this line.

Second Shock: The Warsh Effect

Around 8 PM on January 29, Bitcoin sharply declined again, dropping 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 an official announcement expected on January 30.

Kevin Warsh is generally viewed as a hawkish figure in the market. During his tenure as a Federal Reserve Governor from 2006 to 2011, he consistently opposed quantitative easing policies, warning of the inflation risks they posed. When the Federal Reserve initiated its second round of quantitative easing in 2011, Warsh promptly resigned.

Speculation regarding Warsh's nomination was interpreted as contrary to Trump's willingness to lower interest rates, triggering market concerns about tightening liquidity. Cryptocurrencies have historically performed well in environments of ample liquidity—when investors are willing to allocate more funds to high-risk assets. The prospect of Warsh leading the Federal Reserve spread panic about tightening liquidity. In a market already facing liquidity constraints, investors began to sell off.

Short-term Correction, Long-term Momentum Remains Intact

The market continues to harbor concerns about Warsh's hawkish reputation; however, the actual implementation of policies may not be as stringent as anticipated.

In a Wall Street Journal column, Warsh proposed a compromise approach: limited interest rate cuts combined with balance sheet contraction. This framework attempts to find a balance between Trump's desire for lower rates and Warsh's inflation discipline. The implication is that while the overall stance remains hawkish, there is some flexibility in the trajectory of interest rates.

Therefore, the total number of rate cuts may be fewer than during Powell's tenure, but the likelihood of a return to full tightening is low. Even if Warsh becomes Chair, the Federal Reserve is expected to maintain a gradual easing direction.

Meanwhile, the friendly policies of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission towards cryptocurrencies are gradually being implemented. Allowing cryptocurrency investments to be included in 401(k) retirement accounts could open the floodgates for up to $1 trillion in potential capital inflows. The rapid advancement of legislative structures for digital asset markets 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 already 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 tool. Historically, whenever tech stocks stagnate due to bubble concerns, funds often rotate into alternative assets.

What truly remains unchanged is even more important. Looking at a longer time horizon, global liquidity continues to expand, and institutional policy positions on cryptocurrencies remain firm. Strategic accumulation at the institutional level is still progressing in an orderly manner, and the Bitcoin network itself has not encountered any operational issues. The current pullback is merely a short-term excessive volatility induced by thin liquidity and has not shaken the foundation of the long-term bullish trend.

Original link: Tiger Research

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