The real culprit behind the crypto crash: the Walsh effect

Author: jk, Odaily Planet Daily

Open any encrypted data platform, and all you'll see is a sea of ​​blood red.

As of press time, Bitcoin (BTC) is currently priced at $78,214, down 6.9% in the last 24 hours and 12.4% in the last 7 days. Ethereum (ETH) fared even worse, currently priced at $2,415, down 10.5% in the last 24 hours and 18.2% in the last 7 days. Solana (SOL) also suffered losses: $103.51, down 11.6% in the last 24 hours and 18.4% in the last 7 days. BNB and XRP also saw double-digit declines.

The question is, what triggered this mass retreat?

The answer points to the same name: Kevin Warsh.

On January 30, U.S. President Donald Trump announced on the social media platform Truth Social that he had nominated former Federal Reserve Governor Kevin Warsh as the next Federal Reserve Chairman, succeeding Jerome Powell, whose term was set to expire in May.

This news triggered a chain reaction in the financial markets. Gold and silver both plummeted yesterday, with silver falling by more than 30%; while the cryptocurrency market began to face pressure last night. Bitcoin plunged from around $90,400 to around $81,000 before and after the nomination, and then continued to decline to its current level of $78,214. ETF outflows approached $1 billion in a single day, triggering a chain reaction of liquidations.

On the surface, this appears to be just a personnel appointment. However, the underlying logic is far more complex. This article attempts to analyze: what market nerves are affected by this so-called "Wash effect"? Is the cryptocurrency crash a rational prediction of monetary policy direction, or an overreaction driven by emotions?

Who is Kevin Warsh in the Warsh Effect?

Before understanding the market reaction, it is necessary to get to know this person, namely the new Federal Reserve Chairman.

Kevin Warsh, 55, is a Stanford University graduate and a Harvard Law School alumnus. He previously worked at Morgan Stanley in mergers and acquisitions. In 2006, at the age of 35, he was appointed a Federal Reserve Governor, becoming the youngest governor in the Fed's history at the time. He held this position during the height of the 2008 global financial crisis, acting as a bridge between the Fed and financial markets, and experiencing one of the most challenging periods in history for monetary policy decision-making.

After leaving the Federal Reserve, Warsh moved into academia and think tanks, where he is currently a distinguished fellow at the Hoover Institution, a lecturer at Stanford Graduate School of Business, and also works at the Duquesne Family Office founded by prominent investor Stanley Druckenmiller.

His political stance is fundamentally that of a monetary policy hawk. During the financial crisis, when the global economy was teetering on the brink and the risk of deflation even outweighed the risk of inflation, he repeatedly emphasized the need to be wary of inflation, even voting against the Federal Reserve's second round of quantitative easing (QE2). He has long been critical of the Fed's excessive economic stimulus after the financial crisis, believing that "large-scale asset purchases and zero-interest-rate policies risk distorting markets and damaging long-term price stability."

This was the first alarm signal that triggered in the market when it heard he had been nominated.

Why did the crypto market crash? A breakdown of the core logic.

1. Liquidity Tightening

The cryptocurrency bull market has long been built on a core logic: the liquidity injected by loose monetary policy is the cornerstone driving up the prices of risky assets. When the Federal Reserve maintains low interest rates and continues to expand its balance sheet, massive amounts of funds flow into traditional financial products with low fixed-income returns: stocks, real estate, and cryptocurrencies.

Warsh's hawkish reputation suggests a diametrically opposed approach. He favors tightening monetary policy, reducing the Federal Reserve's balance sheet, and maintaining high real interest rates. In such a macroeconomic environment, funds will flow back to safe-haven assets, risk appetite will decline, and cryptocurrencies will be the first to be affected.

Markus Thielen, founder of 10x Research, aptly summarized this: The market generally believes that Warsh's emphasis on monetary discipline and preference for higher real interest rates have redefined cryptocurrencies from "a hedge against dollar depreciation" to "a speculative bubble that will burst when liquidity dries up."

2. ETF inflows reversed

The technical transmission mechanism of this plunge is particularly noteworthy. Following the announcement of Warsh's nomination, US-listed Bitcoin and Ethereum ETFs experienced net outflows of nearly $1 billion in a single trading day. This figure alone was enough to create a shock, but its ripple effects were even more significant.

ETF outflows triggered a price drop, which in turn triggered stop-loss orders for numerous leveraged positions in the market. This is a classic vicious cycle: forced liquidations create selling pressure, further driving down prices, which in turn triggers more liquidations, creating a self-reinforcing cycle. After Bitcoin broke through key support around $85,000 (near the 100-week simple moving average), this cascading effect accelerated dramatically, with prices sliding all the way to around $81,000 and now further down to $78,214.

The impact of this liquidation on different assets was uneven. Throughout the event, L1 tokens other than Bitcoin generally experienced larger declines than BTC. Ethereum fell 18.2% in 7 days, Solana reached 18.4%, and XRP also fell by 15.5%, all significantly exceeding Bitcoin's 12.4%. This structural divergence has a clear logical explanation: Bitcoin, due to the widespread adoption of ETF products, possesses relatively deeper institutional liquidity and a more robust price support mechanism; while trading of L1 tokens such as ETH and SOL relies more on leveraged positions on native crypto platforms, making them more vulnerable to a cascading liquidation when liquidity dries up. For projects within the Solana ecosystem, SOL's 18.4% drop means a direct impact on on-chain activity and trading volume.

Meanwhile, looking at the overall ETF inflow trend in 2026, there has already been a net outflow of approximately $32 million, a stark contrast to the combined inflow of over $35 billion in 2024 and 2025.

3. The squeeze on risky assets caused by rising real interest rates.

When real interest rates (the "real" cost of borrowing, i.e., the nominal interest rate minus the inflation rate) rise, the cost of holding high-risk assets becomes apparent. Higher yields on traditional assets lead to a withdrawal of funds from crypto assets like Bitcoin and a shift towards bonds and other safer allocations.

Warsh's consistent stance on "higher real interest rates" directly threatens the pricing foundation of this market. A large number of leveraged positions in the cryptocurrency market rely on low-cost borrowing to maintain their positions; rising real interest rates mean soaring leverage costs, putting pressure on these positions.

But his attitude toward Bitcoin is far more complex than the market anticipated.

The cryptocurrency market crash was primarily driven by concerns about the direction of macroeconomic monetary policy—this is an undeniable fact. However, to fully characterize Warsh's attitude towards the crypto space solely based on "hawkish monetary policy" would overlook a crucial dimension: he actually holds an exceptionally constructive view of Bitcoin itself.

In a 2025 interview with the Hoover Institution, Warsh stated unequivocally: "Bitcoin doesn't make me nervous... I see it as an important asset that helps policymakers determine whether they are doing the right thing or the wrong thing." He characterized Bitcoin as a "good cop" for policymaking—its price fluctuations can reflect signals of the Federal Reserve's missteps in managing inflation and implementing monetary policy.

Furthermore, Warsh characterized the cryptocurrency industry as a matter of national economic competitiveness. He emphasized that the main hub for Bitcoin and cryptocurrency software development is the United States, implying that it is strategically important for the US to maintain its leading position in this field. He himself has also invested in crypto startups.

Confirmation of Hearings and Future Policy Direction

As of now, Warsh has not officially taken office. His appointment still requires confirmation by the U.S. Senate. Senator Thom Tillis has publicly stated that he will block the confirmation of any Federal Reserve Chair nominee until the investigation into the Federal Reserve building renovations is completed. This means the entire confirmation process could be fraught with uncertainty.

More importantly, even if Warsh ultimately takes office, he cannot single-handedly control monetary policy. The Federal Reserve's interest rate decisions are made by a vote of the entire FOMC (Federal Open Market Committee), and Warsh is only one of twelve votes. Currently, a majority of FOMC members have clearly stated that they are unwilling to continue cutting interest rates until there is more substantial evidence that inflation is steadily returning to the 2% target. The December dot plot shows only one rate cut is projected in 2026 and another in 2027.

This means that, regardless of Warsh's personal inclinations, actual monetary policy actions will depend on the consensus of the entire committee—a consensus that currently remains cautious.

Foresight of the Crypto Market

In summary, the current crypto market's reaction to Warsh's nomination presents two distinct narratives:

Bearish Narrative (Mainstream Market Reaction): The "Wash Effect" implies tighter monetary policy, higher real interest rates, and a smaller Federal Reserve balance sheet. This directly compresses the liquidity environment upon which cryptocurrencies depend. Current market data already reflects this impact—BTC is currently priced at $78,214, a cumulative drop of approximately 13.5% from its pre-nomination high of $90,400; while Solana ranks among the top decliners with a 7-day drop of 18.4%. This is a tangible structural risk signal for Solana ecosystem projects, DeFi protocols, and token issuance activities that rely on low-cost leverage.

Bullish narrative (community voices): The "Warsh effect" holds a positive view of Bitcoin itself; the Trump administration as a whole still tends to support the crypto industry; and Warsh has recently hinted that he is willing to give the green light to interest rate cuts if productivity improves. Not to mention, he cannot unilaterally determine the direction of interest rates.

The truly noteworthy moment will be the Senate confirmation hearing: Warsh will be pressed on his specific stances regarding monetary policy, crypto regulation, and CBDCs. The outcome of this hearing may determine the fate of the crypto industry in the coming months more decisively than any market speculation today.

For projects driving community growth and token ecosystem development, the most significant practical implications of the "Wash effect" currently lie in the fact that the macro liquidity environment is entering a period of uncertainty. Short-term sentiment fluctuations have already occurred, but the real policy impact is still on the way.