Tiger Research: Liquidity vacuum drives sharp sell-off, why hasn't Bitcoin rebounded?

Bitcoin’s sharp decline caught the market off guard. This report, authored by Tiger Research, provides an in-depth analysis of the driving factors behind this sell-off and outlines potential recovery scenarios.

Key Takeaways

• Bitcoin dropped from $87,000 to $81,000 on January 29, and continued to fall below $80,000.
• Disappointing earnings from Microsoft weighed down the Nasdaq index, breaking the support of active realized price near $87,000 for Bitcoin.
• Market speculation that Kevin Waleh will be nominated as Federal Reserve Chair triggered downward pressure, despite actual policies possibly being less aggressive than market expectations.
• Regulators remain friendly toward cryptocurrencies, but with $84,000 already lost, short-term downside risks cannot be ignored.

Bitcoin Lagging in the Rebound

Bitcoin experienced two rapid declines in a short period. Around 9 a.m. Eastern Time on January 29, Bitcoin began sliding from near $87,000; by 10 a.m. the next day, it had fallen to approximately $81,000, a decline of about 7%. The overall crypto market was weak, and investor sentiment deteriorated sharply.

This trend was not caused by a single negative signal but resulted from a dual shock of traditional financial market impacts and uncertainty in monetary policy. The first trigger was the earnings shock from large tech companies, and the second was concerns over leadership changes at the Federal Reserve.

Both declines share a common underlying reason: trading volume in Bitcoin’s spot and futures markets has been continuously shrinking. Under low liquidity, even minor shocks can trigger excessive price volatility. Stocks and commodities rebounded quickly after brief corrections, but Bitcoin failed to follow suit.

Currently, the market is avoiding Bitcoin. Trading volume continues to shrink, selling pressure persists, and price rebounds are becoming increasingly unsustainable.

First Shock: AI Bubble Concerns Spill into Bitcoin

Bitcoin started facing pressure on January 29, driven by a sharp decline in the Nasdaq index. Microsoft’s Q4 earnings fell short of expectations, reigniting fears of an overhyped AI-related bubble. Amid widespread panic, investors began reducing risk asset positions. Bitcoin, with its high volatility, experienced particularly sharp declines.

What made this decline especially severe was the price level Bitcoin lost support at. During the downtrend, it broke through an important structural support—the Active Realized Price.

At that time, this level was around $87,000. The Active Realized Price excludes long-unused holdings and is calculated based on the average cost of tokens actively circulating in the market. In other words, it represents the profit and loss boundary for current active traders. Once broken, most active participants find themselves in a loss simultaneously. Bitcoin decisively broke through this line.

Second Shock: Waleh Effect

Around 8 p.m. 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 Waleh as the next Federal Reserve Chair, with an official announcement scheduled for January 30.

Kevin Waleh is generally viewed as a hawkish figure. From 2006 to 2011, he served as a Federal Reserve Board member and opposed quantitative easing policies, warning of inflation risks. When the Fed launched a second round of QE in 2011, Waleh resigned.

Speculation about Waleh’s nomination was interpreted as conflicting with Trump’s willingness to cut interest rates, sparking concerns about tightening liquidity. Cryptocurrencies have historically performed well in periods of ample liquidity—investors are more willing to allocate funds to high-risk assets. The prospect of Waleh leading the Fed fueled fears of liquidity tightening. In an already tight liquidity environment, investors began to sell off assets.

Short-term Correction, Long-term Momentum Intact

Market concerns about Waleh’s hawkish reputation persist, but actual policy implementation may not be as aggressive as expected.

In a column for The Wall Street Journal, Waleh proposed a compromise approach: limited rate cuts combined with balance sheet reduction. This framework aims to balance Trump’s desire for rate cuts with Waleh’s inflation discipline. The implication is that, overall, the stance remains hawkish, but with some flexibility in interest rate movements.

Therefore, the total number of rate cuts may be fewer than during Powell’s tenure, but a full tightening cycle is unlikely. Even if Waleh becomes Chair, the Fed is expected to maintain a gradual easing stance.

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

In the short term, uncertainty remains. Bitcoin is likely to continue following stock market fluctuations. With $80,000 already lost, further downside risks cannot be ruled out. However, once the stock market stabilizes, Bitcoin may once again become a favored alternative investment. Historically, whenever tech stocks stall due to bubble fears, funds tend to rotate into alternative assets.

What remains truly unchanged is even more important. Looking at a longer time horizon, global liquidity continues to expand, and institutional policy positions on cryptocurrencies remain firm. Institutional strategic accumulation is still progressing in an orderly manner, and the Bitcoin network itself has not experienced operational issues. The current correction is merely a short-term overreaction driven by thin liquidity and does not undermine the long-term bullish trend.

Original link: Tiger Research