The sharp drop in Bitcoin caught the market off guard. This report, written by Tiger Research , provides an in-depth analysis of the driving factors behind this sell-off and outlines potential recovery scenarios.
Key points summary
- Bitcoin fell from $87,000 to $81,000 on January 29 and continued to fall below $80,000.
- Microsoft's disappointing earnings report dragged down the Nasdaq index, and Bitcoin's active price support near $87,000 was subsequently broken.
- Market speculation about Kevin Walsh's nomination as Federal Reserve chairman triggered downward pressure, even though the actual policy may not be as stringent as the market anticipates.
- Regulators remain friendly towards cryptocurrencies, but the $84,000 level has been breached, and the downside risk in the short term cannot be ignored.
Bitcoin lagged behind in the rally
Bitcoin experienced two sharp drops in a short period. Around 9 a.m. Eastern Time on January 29, Bitcoin began to decline from around $87,000; by 10 a.m. the following day, it had fallen to approximately $81,000, a drop of about 7%. The overall crypto market was weak, and investor sentiment deteriorated sharply as a result.
This trend did not stem from a single negative signal, but rather from the combined impact of traditional financial market shocks and monetary policy uncertainty. The first round of declines was triggered by the earnings reports of large technology companies, while the second round arose from concerns about a change in leadership at the Federal Reserve.
The two rounds of declines share a common underlying cause: a continued contraction in trading volume in both the Bitcoin spot and futures markets. In a liquidity-scarce environment, even minor shocks are enough to trigger excessive price volatility. While stocks and commodities rebounded quickly after brief declines, 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 over into Bitcoin
Bitcoin began to come under pressure on January 29th, triggered by a sharp drop in the Nasdaq index. Microsoft's weaker-than-expected fourth-quarter earnings reignited concerns about an over-bubble in AI-related investments. Amidst the spreading panic, investors began reducing their positions in risky assets. Bitcoin, being inherently volatile, experienced a particularly sharp decline.
What made this decline particularly devastating was the price level Bitcoin breached. During the downtrend, it broke through a crucial structural support level – the active realized price .
At the time, this level hovered around $87,000. The active realized price excludes long-term inactive positions and instead uses the average cost calculated from tokens actively circulating in the market. In other words, it's the break-even point for currently trading investors. Once it falls below this level, most active participants simultaneously incur losses. And Bitcoin decisively broke through this line.
The second shock: The Wolshey effect
Around 8 PM on January 29th, Bitcoin experienced another sharp drop, falling rapidly from $84,000 to $81,000. Bloomberg and Reuters reported that President Trump is preparing to nominate Kevin Walsh as the next Federal Reserve Chairman, with a formal announcement scheduled for January 30th.
Kevin Walsh is widely regarded as a hawk in the market. During his tenure as a Federal Reserve governor from 2006 to 2011, he consistently opposed quantitative easing, warning of the risk of inflation. When the Fed launched its second round of quantitative easing in 2011, Walsh resigned.
Speculation surrounding Walsh's nomination was interpreted as contradicting Trump's desire to cut interest rates, immediately triggering market concerns about tightening liquidity. Cryptocurrencies have historically performed well when liquidity is abundant—when investors are willing to allocate more funds to higher-risk assets. The prospect of Walsh leading the Federal Reserve fueled fears of tightening liquidity. In a market already experiencing tight liquidity, investors subsequently began selling off.
Short-term correction, medium- to long-term momentum remains intact.
Market concerns persist about Wolshe's hawkish reputation; however, the actual implementation of policies may not be as forceful as anticipated.
In his Wall Street Journal column, Walsh proposed a compromise: limited interest rate cuts combined with balance sheet contraction. This framework attempts to find a balance between Trump's willingness to cut rates and Walsh's inflation discipline. The implication is: an overall hawkish stance, but with some flexibility in interest rate policy.
Therefore, while the total number of rate cuts may be fewer than during Powell's tenure, a return to full-scale tightening is unlikely. Even with Walch as chairman, the Federal Reserve is expected to maintain its basic direction of gradual easing.
Meanwhile, favorable policies towards cryptocurrencies from the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are gradually being implemented. Allowing cryptocurrency investments to be included in 401(k) retirement accounts will open the floodgates to a potential inflow of up to $1 trillion into the market. The rapid progress of legislation governing the digital asset market structure is also noteworthy.
In the short term, uncertainty remains. Bitcoin is likely to continue to fluctuate in tandem with 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 tend to rotate into alternative assets.
What truly remains unchanged is precisely what matters most. Looking at a longer time horizon, global liquidity continues to expand, and institutional policy stances on cryptocurrencies remain firm. Strategic accumulation at the institutional level is proceeding in an orderly manner, and the Bitcoin network itself has not experienced any operational problems. The current pullback is merely a short-term over-fluctuation caused by thin liquidity and has not shaken the foundation of the medium- to long-term bullish trend.
Original link: Tiger Research
