The real culprit behind the crypto crash: Wash Effect

Author: jk, Odaily Planet Daily

Open any cryptocurrency 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 12.4% over 7 days. Ethereum (ETH) is even more brutal, currently at $2,415, down 10.5% in 24 hours and 18.2% over 7 days. Solana (SOL) is also not spared: $103.51, down 11.6% in 24 hours and 18.4% over 7 days. Looking at BNB and XRP, both have 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 proposed former Federal Reserve Governor Kevin Warsh as the next Fed 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 cryptocurrency market began to feel the pressure last night. Bitcoin dropped sharply from about $90,400 after the nomination to around $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—namely, the new Fed Chair nominee.

Kevin Warsh, 55, a Stanford graduate and Harvard Law School alumnus, 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 renowned investor Stanley Druckenmiller.

His political stance is hawkish on monetary policy. During the financial crisis, when the global economy was perilously close to recession, with deflation risks possibly outweighing 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 distortions and harm long-term price stability.”

This was the first signal that triggered alarm bells in the market 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 financial products with low yields: stocks, real estate, and cryptocurrencies.

Warsh’s hawkish reputation implies 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, U.S.-listed spot Bitcoin and Ethereum ETFs experienced nearly $1 billion in net outflows in a single trading day. This figure alone is enough to cause shock, 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. After breaching the key support around $85,000 (near the 100-week simple moving average), this cascade accelerated sharply, pushing prices down to around $81,000, and now further down to $78,214.

This liquidation impacts different assets unevenly. Over the course of the evolution, altcoins outside of Bitcoin generally fell more sharply. ETH declined 18.2% over 7 days, Solana 18.4%, XRP 15.5%, all significantly exceeding Bitcoin’s 12.4%. This structural divergence has a clear logical explanation: Bitcoin, due to widespread ETF adoption, has relatively 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 itself indicates a direct impact 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 interest minus inflation) rise, the cost of holding high-risk assets becomes obvious. Yields on traditional assets increase, prompting funds to withdraw from assets like Bitcoin and shift into bonds and other 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 interest 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 mainly driven by concerns over macro monetary policy—this is an undeniable fact. But if we only see “hawkish monetary policy” as Warsh’s attitude toward crypto, we overlook an important dimension: he actually holds a surprisingly constructive view of Bitcoin itself.

In a 2025 interview with 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 signals of Fed missteps in managing 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 full of uncertainties.

More critically, even if Warsh is ultimately confirmed, 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 holding one of twelve votes. Currently, most FOMC members have made it clear they are reluctant to cut rates further before more evidence shows 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 policy actions will depend on the consensus of the entire committee—and that consensus remains cautious.

Outlook for the crypto market

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

Bearish narrative (mainstream market reaction): “Warsh Effect” means 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 prominent, signaling structural risks for Solana ecosystem projects, DeFi protocols, and token issuance relying on low-cost leverage.

Bullish narrative (community voices): The “Warsh Effect” has a positive attitude toward Bitcoin itself; the overall Trump administration remains supportive of the crypto industry, and 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 stance 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 that the macro liquidity environment is entering a period of uncertainty. Short-term emotional swings have already occurred, but the real policy impact is still on the way.