Bitcoin's sharp decline caught the market off guard. This report, written 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 $80,000.
- Disappointing earnings from Microsoft dragged down the Nasdaq index, breaching the key active realized price support for Bitcoin near $87,000.
- Speculation about Kevin Warsh's nomination as Fed Chair created downward pressure, although actual policies may not be as harsh as the market feared.
- Regulators remain friendly towards crypto, but the loss of the $84,000 level suggests 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, it began sliding from around $87,000; by 10 AM the next day, it had fallen to approximately $81,000, a drop of about 7%. The overall market weakness led to a rapid deterioration in investor sentiment.
This movement was not due to a single negative signal but rather a dual shock from traditional financial market turmoil and monetary policy uncertainty. The first decline was triggered by earnings shocks from large tech companies, while the second stemmed from concerns about a potential change in Federal Reserve leadership.
A common underlying cause behind both sell-offs was the持续萎缩 (continuously shrinking) trading volume in both Bitcoin spot and futures markets. Amid low liquidity, even minor shocks can trigger excessive price volatility. Stocks and commodities quickly rebounded after brief pullbacks, but Bitcoin failed to follow suit.
Currently, the market is shunning Bitcoin. Trading volume continues to contract, selling pressure persists, and price rebounds are becoming increasingly difficult to sustain.
First Shock: AI Bubble Worries Spill Over into Bitcoin
Bitcoin came under pressure starting January 29th, driven by a sharp drop in the Nasdaq index. Microsoft's Q4 earnings fell short of expectations, reigniting market concerns about over-inflated bubbles in AI-related investments. As panic spread, investors began reducing their positions in risk assets. Bitcoin, inherently highly volatile, experienced a particularly sharp decline.
The particular deadliness of this drop lay in the price level Bitcoin lost. During the decline, it breached a crucial structural support level—the Active Realized Price.
At the time, this level was maintained near $87,000. The Active Realized Price excludes long-dormant holdings, instead calculating the average cost basis based on tokens actively circulating in the market. In other words, it represents the profit/loss breakeven point for currently active traders. Once breached, the majority of active participants simultaneously fall into a loss. And Bitcoin cleanly broke through this line.
Second Shock: The Warsh Effect
Around 8 PM ET on January 29th, Bitcoin plummeted again, rapidly from $84,000 to $81,000. Bloomberg and Reuters reported that President Trump was preparing to nominate Kevin Warsh for the next Fed Chair, with a formal announcement expected on 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 policies, warning of their inflationary risks. When the Fed launched QE2 in 2011, Warsh resigned shortly thereafter.
Speculation about Warsh's nomination was interpreted as contradicting Trump's desire for interest rate cuts, immediately sparking concerns about liquidity tightening. Cryptocurrencies have historically performed well in times of abundant liquidity—when investors are willing to allocate more capital to high-risk assets. The prospect of Warsh steering the Fed spread panic about tighter liquidity. In a market already suffering from thin liquidity, investors promptly began selling.
Short-Term Correction, Medium-to-Long-Term Momentum Remains Intact
Market concerns about Warsh's hawkish reputation persist; however, the actual implementation of policy may not be as强硬 (forceful/aggressive) as imagined.
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: overall still leaning hawkish, but retaining some flexibility regarding the path of interest rates.
Therefore, the total number of rate cuts might be fewer than during 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 policies towards cryptocurrency from the SEC and CFTC are being gradually implemented. Allowing cryptocurrency investments into 401(k) retirement accounts could open the floodgates to up to $1 trillion in potential capital inflows. The rapid advancement of digital asset market structure legislation is also noteworthy.
In the short term, uncertainty remains. Bitcoin will likely continue to follow the ups and downs of the stock market. With the $80,000 level lost, 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 vehicle. Historical experience shows that whenever tech stocks stall due to bubble fears, funds often rotate into alternative assets.
What remains unchanged is, crucially, more important. Looking at a longer time horizon, global liquidity continues to expand, and institutional policy stances towards cryptocurrency remain firm. Strategic accumulation at the institutional level is still proceeding orderly, and the Bitcoin network itself shows no operational issues. The current pullback is merely short-term excessive volatility fueled by thin liquidity and does not shake the foundation of the medium-to-long-term bullish trend.
Original link: Tiger Research
