Sharp Decline in a Liquidity Vacuum: Why Has Bitcoin Alone Failed to Rebound?

Original Title: Liquidity Vacuum Drives Sharp Sell-Off: Why Only Bitcoin Failed to Recover

Source: Tiger Research

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

· Bitcoin fell from $87,000 to $81,000 on January 29 and continued to breach below the $80,000 mark.

· Microsoft's disappointing earnings dragged down the Nasdaq index, breaking through the active realized price support near $87,000 for Bitcoin.

· Market speculation regarding Kevin Warsh's nomination as Federal Reserve Chair triggered downward pressure, although actual policies may not be as stringent as anticipated by the market.

· Regulatory authorities remain friendly toward cryptocurrencies, but the breach of $84,000 indicates that short-term downside risks should not be overlooked.

Bitcoin experienced two sharp declines within a short period. Around 9:00 AM EST on January 29, Bitcoin began to fall from near $87,000; by 10:00 AM the next morning, it had dropped to approximately $81,000, marking a decline of about 7%. The overall cryptocurrency market showed weakness, and investor sentiment deteriorated sharply.

This movement was not caused by a single negative signal but rather by a dual shock from traditional financial markets and monetary policy uncertainty. The trigger for the first round of declines was the earnings impact from large technology companies, while the second round stemmed from concerns over a leadership change at the Federal Reserve.

A common underlying cause lies behind the two rounds of declines: the persistent contraction in trading volume in both the Bitcoin spot and futures markets. Under conditions of low liquidity, even minor shocks can trigger excessive price volatility. While stocks and commodities quickly rebounded after a brief correction, Bitcoin failed to follow suit.

At present, the market is shying away from Bitcoin. The ongoing contraction in trading volume, coupled with continuous selling pressure, has made price rebounds increasingly unsustainable.

Bitcoin began to come under pressure on January 29, triggered by a sharp decline in the Nasdaq Index. Microsoft’s weaker-than-expected fourth-quarter earnings report reignited concerns over excessive frothiness in AI-related investments. Amid spreading panic, investors began reducing their positions in risk assets. Given Bitcoin’s inherently high volatility, its decline was particularly severe.

The reason this decline was especially lethal lies in the specific price level that Bitcoin failed to defend. In the course of the downturn, it breached an important structural support – the realized active price.

At the time, this level was hovering around $87,000. The realized active price excludes holdings that have remained untouched for extended periods and instead calculates the average cost based on tokens actively circulating in the market. In other words, it represents the break-even line for investors currently engaging in trades. Once this threshold was broken, the majority of active participants found themselves simultaneously incurring losses. And Bitcoin decisively plunged through this line.

Around 8 p.m. on January 29, Bitcoin experienced another sharp drop, plunging rapidly 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 the official announcement scheduled for January 30.

Kevin Warsh is widely perceived by the market as a hawkish figure. During his tenure as a Federal Reserve Governor from 2006 to 2011, he consistently opposed quantitative easing, warning of its potential to fuel inflation risks. When the Federal Reserve launched its second round of quantitative easing in 2011, Warsh promptly resigned.

Speculation about Warsh’s nomination was interpreted as running counter to Trump’s preference for interest rate cuts, immediately sparking fears of tightening liquidity. Cryptocurrencies have historically performed well during periods of abundant liquidity, when investors are more willing to allocate funds to high-risk assets. The prospect of Warsh leading the Federal Reserve spread panic over a liquidity squeeze. In an already tight liquidity environment, investors swiftly moved to offload their holdings.

The market continues to harbor concerns about Warsh's reputation as a hawk. 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 reduction. This framework attempts to strike a balance between Trump’s desire for rate cuts and Warsh’s commitment to inflation discipline. The implication is that while the overall stance remains hawkish, some flexibility in interest rate movements will be retained.

As a result, the total number of rate cuts may be fewer than during Powell’s tenure, but a return to full tightening is unlikely. Even if Warsh becomes chairman, the Federal Reserve is still expected to maintain a gradual easing trajectory.

Meanwhile, friendly policies towards cryptocurrencies by the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission are gradually being implemented. Allowing cryptocurrency investments in 401(k) retirement accounts could unlock up to $1 trillion in potential inflows into the market. The rapid progress of legislative frameworks for digital asset market structures is also noteworthy.

In the short term, uncertainties remain. Bitcoin is likely to continue following the ups and downs of the stock market. With the breach of the $80,000 level, further downside risks cannot be ruled out. However, once the stock market enters a consolidation phase, Bitcoin may again become a favored alternative investment. Historically, whenever technology stocks have stalled due to bubble concerns, capital has often rotated into alternative assets.

What remains unchanged is perhaps more important. Looking at a longer time horizon, global liquidity continues to expand, and institutions’ policy stances on cryptocurrencies remain firm. Strategic accumulation at the institutional level is proceeding in an orderly manner, and the Bitcoin network itself has shown no operational issues. The current pullback is merely a result of thin liquidity causing short-term excessive volatility, without undermining the foundation of the medium- to long-term bullish trend.