A major sell-off swept through crypto markets in the last few days, pushing Bitcoin (BTC) to its lowest price since November 2024.
According to analysis from Binance Research, the move was triggered by news that Kevin Warsh had been nominated to chair the Federal Reserve, with markets interpreting his historical stance as a sign of aggressive liquidity tightening, forcing widespread deleveraging.
However, Binance Research suggested the reaction may be overblown, as physical constraints in the financial system could prevent the severe balance sheet reduction the market fears.
Liquidity Crisis Hits the End of the Chain
Per Binance analyst Michael JJ, last week’s turbulence displayed classic signs of a liquidity scramble. Following disappointing earnings from major tech firms such as Microsoft and rising geopolitical tensions, the nomination of Warsh, known for advocating a reduction of the Fed’s bond holdings, sparked a rush to exit risk.
Traders facing margin calls sold their most liquid assets to raise cash, and precious metals saw trading volumes spike to over ten times normal levels as the U.S. dollar rebounded sharply. Data presented by the on-chain technician shows cryptocurrencies acted as “end-of-liquidity-chain” assets, meaning they were among the first sold when liquidity was needed elsewhere.
When gold fell, crypto fell with it, but when the metal rebounded, digital assets continued to drop alongside stocks. This confirmed its low priority in the liquidity hierarchy. In that period, Bitcoin broke below several critical technical supports, including the head-and-shoulders neckline and key moving averages, hitting an intraday low near $73,000 on February 4.
Are QT Fears Overstated?
The core of the Binance Research argument is that markets are overpricing the risk of Quantitative Tightening (QT) under a potential Warsh chairmanship. While his proposals call for shrinking the Fed’s balance sheet, the report outlined technical constraints that may make aggressive contraction physically difficult.
For instance, the Fed’s reverse repo facility, a crucial buffer, is approaching its depletion point. This means future QT would directly drain bank reserves, potentially pushing them below regulatory minimums and risking a repo market crisis like the one seen in 2019.
Furthermore, the U.S. Treasury’s need to issue about $2 trillion in new debt annually requires a buyer. If the Fed steps back as a net purchaser through QT, the private sector must absorb the supply, which could strain markets.
The analysis suggests that without changes to banking regulations, such as exempting Treasuries from certain capital ratios, the financial system’s “plumbing” cannot support the balance sheet shrinkage Warsh has historically supported.
As a result, such regulatory changes are seen as a longer-term possibility, not an immediate threat.
The report also pointed to the resolution of the latest U.S. government shutdown on February 3 as a positive development that may have been overlooked in the recent market frenzy. The development removed a source of near-term policy uncertainty, allowing federal agencies to be funded through September 2026.
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