Bitcoin's Liquidity Crunch: The Fed Nomination Fallout

The direct trigger was a policy shift that sparked a flight from risk. When President Trump named Kevin Warsh as the next Fed chair in late January, markets immediately priced in a potential shrinking of the central bank's balance sheet. This expectation hit crypto assets hard, as the sector is highly sensitive to changes in monetary liquidity and perceived regulatory stance. The sell-off began that weekend, with Bitcoin plunging and digital asset prices seesawing in the days that followed.

The price impact was severe and immediate. Bitcoin briefly fell below $70,000 on Thursday, marking the first time it had traded that low since November 2024. This breakdown of a key psychological and technical level accelerated selling pressure. The broader crypto market was caught in the downdraft, with the total value of all cryptocurrencies roughly halving since that October peak, equivalent to over $2 trillion in lost value. Bitcoin's decline was the primary driver of this massive market contraction.

The sell-off revealed a market in thin liquidity, making it vulnerable to sharp swings. Analysts noted that reduced liquidity translates into sharper and more erratic price movements. This dynamic was compounded by a reversal in institutional support, as U.S. exchange-traded funds that once bought Bitcoin became net sellers in 2026. The combination of a new policy catalyst and fragile market structure created a perfect storm for a panic-driven drop.

The Liquidity Engine: Why Crypto is Especially Vulnerable

The market's thinness is not a temporary glitch but a structural condition that has worsened for months. Bitcoin's average 1% market depth, a key measure of liquidity, has fallen to around $5 million. That represents a significant contraction from over $8 million in 2025, meaning the amount of bitcoin available to trade at close to the current price has shrunk. This ongoing liquidity crunch directly translates into sharper and more erratic price movements, amplifying every sell-off.

The recent 13% single-day drop on February 5 was a stark demonstration of this extreme sensitivity. That was Bitcoin's worst one-day decline since the FTX collapse in November 2022, a period defined by a catastrophic loss of market trust. The magnitude of that move, in a market with such limited depth, highlights how vulnerable the asset is to even modest selling pressure. The contraction has been underway for several months and remains ongoing, suggesting this fragile state is likely to persist.

Yet, amid the turmoil, a counter-narrative of accumulation is emerging. Despite the crash, major crypto platforms saw customer inflows in recent days. This suggests retail investors are actively buying during the dip, potentially laying the groundwork for a future rebound. The dynamic is one of extreme volatility meeting opportunistic buying, a classic setup for a volatile recovery.

The Path Forward: Scenarios and Key Levels

The immediate bounce above $70,300 is a relief, but it does not erase the bearish setup. Analysts warn the recent rally is likely to be constrained, with the market facing strong resistance at $65,000 and $60,000. A sustained break below these levels could trigger a cascade of liquidations, accelerating the decline. The current price action suggests a volatile, choppy path is more probable than a smooth recovery.

The most bearish scenario points toward a drop to $45,000. This projection is based on the expectation that a final, sharp plunge will exhaust remaining ETF holders. The setup mirrors classic capitulation patterns, where a final wave of selling clears the market of weak hands. However, this outcome hinges on whales continuing to move funds onto exchanges, a behavior that typically signals heavy selling or hedging.

The current price also signals a deep bear market. Bitcoin is trading well under the average mining cost of $87,000, a traditional indicator that miners are operating at a loss. This fundamental pressure adds a structural floor to the downside, as prolonged losses can force miners to exit the network, reducing security and potentially increasing volatility. The key technical level to watch remains the $70,000 threshold; a decisive break below it would confirm the breakdown and likely open the path to the lower support zones.