The real culprit behind the crypto crash: Wash Effect

Original | Odaily Planet Daily (@OdailyChina)

Author｜jk

Open any crypto data platform, and what you see is a sea of red.

As of press time, Bitcoin (BTC) is priced at $78,214, down 6.9% in 24 hours, and down 12.4% over 7 days. Ethereum (ETH) is even more brutal, currently at $2,415, down 10.5% in 24 hours, and an 18.2% decline over 7 days. Solana (SOL) is also not spared: $103.51, down 11.6% in 24 hours, and an 18.4% drop over 7 days. Looking at BNB and XRP, both are in double-digit declines.

The question is, what triggered this collective retreat?

The answer points to the same name: Kevin Warsh.

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

This news triggered a chain reaction in financial markets. Gold and silver both plummeted yesterday, with silver dropping over 30%; meanwhile, the crypto market began to feel the pressure last night. Bitcoin dropped sharply from about $90,400 around the nomination to approximately $81,000, then continued to decline to the current $78,214. Single-day ETF outflows approached $1 billion, and a chain reaction of liquidation ensued.

On the surface, this is just a personnel appointment. But the underlying logic is far more complex. This article aims to clarify: what exactly is the so-called “Warsh Effect” influencing market nerves? Is the crypto plunge a rational anticipation of monetary policy direction, or an overly emotional overreaction?

Who is Kevin Warsh in the Warsh Effect?

Before understanding the market reaction, it’s necessary to know this person— the new Federal Reserve Chair nominee.

If you want to learn more about him, you can read this article: “Estée Lauder’s ‘Prince Consort’ Kevin Warsh Takes the Helm at the Fed—Hawkish Big Shot or Crypto Ally?”

Kevin Warsh, 55, graduated from Stanford University and Harvard Law School. He previously worked at Morgan Stanley in M&A. In 2006, at age 35, he was appointed as a Federal Reserve Governor, making him the youngest in Fed history at that time. He served during the core period of the 2008 global financial crisis, acting as a bridge between the Fed and financial markets, experiencing some of the most difficult monetary policy decisions in history.

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

His political stance is that of a hawk on monetary policy. During the financial crisis, when the global economy was perilously close to recession, with deflation risks even greater than inflation, he repeatedly emphasized vigilance against inflation, even voting against the Fed’s second round of quantitative easing (QE2). He has long criticized the Fed’s excessive stimulus post-crisis, believing that “large-scale asset purchases and zero interest rate policies risk market distortion and harm long-term price stability.”

This was the first signal that triggered market alarms upon his nomination.

Why did the crypto market crash? Core logic breakdown

1. Liquidity Tightening

The bull market in cryptocurrencies has long been built on a core logic: Loose monetary policy injecting liquidity is the foundation for risk asset price increases. When the Fed maintains low interest rates and continues expanding its balance sheet, massive funds flow into traditional assets with low yields: stocks, real estate, and cryptocurrencies.

Warsh’s hawkish reputation suggests the opposite direction. He favors tightening monetary policy, shrinking the Fed’s balance sheet, and maintaining higher real interest rates. In such a macro environment, funds tend to flow back into safe assets, risk appetite declines, and cryptocurrencies are among the first to be affected.

Markus Thielen, founder of 10x Research, summarized this precisely: the market generally believes that Warsh’s emphasis on monetary discipline and higher real interest rates redefines cryptocurrencies from “dollar devaluation hedges” to “speculative bubbles that fade during liquidity shortages.”

2. ETF Inflows Reversal

This crash’s transmission mechanism at the technical level is particularly noteworthy. After the nomination news broke, U.S.-listed spot Bitcoin and Ethereum ETFs experienced nearly $1 billion in net outflows in a single trading day. This figure alone is impactful, but the chain reaction is even more significant.

ETF outflows trigger price declines, which then hit the stop-loss levels of many leveraged positions. This creates a classic vicious cycle: forced liquidations generate selling pressure, further lowering prices, which triggers more liquidations, forming a self-reinforcing loop. Once Bitcoin’s support near $85,000 (around the 100-week simple moving average) was broken, this cascade accelerated sharply, pushing prices down to around $81,000, and further down to $78,214.

This liquidation impacts different assets unevenly. During the evolution, altcoins outside of Bitcoin generally declined more sharply. ETH fell 18.2% over 7 days, Solana 18.4%, XRP 15.5%, all significantly exceeding Bitcoin’s 12.4%. This structural divergence has a clear logic: Bitcoin benefits from widespread ETF adoption, with deeper institutional liquidity and more robust price support mechanisms; whereas ETH, SOL, and other Layer 1 tokens rely more on leverage positions on native crypto platforms, making them more vulnerable to cascade liquidations during liquidity crunches. For Solana projects, the 18.4% drop in SOL indicates direct impacts on on-chain activity and trading volume.

Meanwhile, looking at the overall ETF inflow trend toward 2026, there has already been about $32 million in net outflows, contrasting sharply with the over $35 billion net inflow in 2024 and 2025.

3. Rising Real Interest Rates and Risk Asset Squeezing

When real interest rates (nominal rates minus inflation) rise, the cost of holding high-risk assets becomes obvious. Yields on traditional assets increase, prompting funds to withdraw from Bitcoin and other crypto assets, shifting into bonds and safer allocations.

Warsh’s consistent stance on “higher real interest rates” directly threatens the pricing foundation of this market. Many leveraged positions in crypto depend on low-cost borrowing; rising real rates mean soaring leverage costs, putting pressure on these positions.

But his attitude toward Bitcoin is more nuanced than market expectations

The crypto market’s plunge is primarily driven by concerns over macro monetary policy—this is an undeniable fact. But if we only interpret Warsh’s hawkish stance as a complete rejection of crypto, we overlook an important dimension: He actually holds an unusually constructive view of Bitcoin itself.

In a 2025 interview at the Hoover Institution, Warsh explicitly stated: “Bitcoin doesn’t make me nervous… I see it as an important asset that can help policymakers judge whether they are doing the right or wrong things.” He characterizes Bitcoin as a “good policeman” for policy—its price volatility can reflect errors in the Fed’s management of inflation and monetary policy.

Furthermore, Warsh regards the crypto industry as a matter of national economic competitiveness. He emphasizes that the main hubs for Bitcoin and crypto software development are in the U.S., implying that maintaining leadership in this field is strategically important for America. He has also invested in crypto startups himself.

Confirmation hearings and future policy directions

Currently, Warsh has not yet officially taken office. His appointment still requires confirmation by the U.S. Senate. Senator Thom Tillis has publicly stated he will block any Fed Chair nominee until investigations into the Fed’s building renovations are completed. This means the confirmation process could be unpredictable.

More importantly, even if Warsh is ultimately appointed, he cannot unilaterally control monetary policy. The Fed’s interest rate decisions are made by the FOMC (Federal Open Market Committee), which votes as a whole, with Warsh only one of twelve members. Currently, most FOMC members have indicated they are unwilling to cut rates further until there is more evidence that inflation is returning to the 2% target. The December dot plot projects only one rate cut 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—and that consensus remains cautious.

Crypto market outlook

Overall, the current crypto market’s reaction to Warsh’s nomination reflects two contrasting narratives:

Bearish narrative (mainstream market reaction): “Warsh Effect” implies tighter monetary policy, higher real interest rates, and a shrinking Fed balance sheet. This directly constrains the liquidity environment that crypto relies on. Market data already reflect this impact—BTC at $78,214, down about 13.5% from the pre-nomination $90,400; Solana’s 18.4% 7-day decline is a leading indicator. For Solana ecosystem projects, DeFi protocols, and token issuances relying on low-cost leverage, this signals a real structural risk.

Bullish narrative (community voices): The “Warsh Effect” indicates a positive attitude toward Bitcoin itself, with the Trump administration generally supportive of the crypto industry. Warsh has recently hinted he is willing to consider rate cuts if productivity improves. Moreover, he cannot decide interest rates alone.

The key point to watch will be the Senate confirmation hearings: Warsh will be questioned about his views on monetary policy, crypto regulation, and CBDCs. The outcome of this hearing may be more decisive for the crypto industry’s fate in the coming months than any current market speculation.

For projects promoting community growth and token ecosystems, the biggest practical significance of the “Warsh Effect” now is: the macro liquidity environment is entering an uncertain phase. Short-term sentiment swings have already occurred, but the real policy impact is still on the way.