Tiger Research: "Bitcoin liquidity vacuum" is the real cause of the two rounds of sharp declines

On February 2, Bitcoin remained sluggish, temporarily trading around $76,850, falling below the active realized price support. Tiger Research pointed out that the shrinking liquidity of Bitcoin is the underlying reason, with Microsoft’s earnings report and Walsh’s nomination news causing excessive volatility in the thin market, and Bitcoin’s rebound lagging behind other assets.

Bitcoin’s liquidity depletion amplifies price fluctuations

Bitcoin has experienced two sharp declines in a short period of time, but the real killer is not the negative news itself, but the continued depletion of market liquidity. Tiger Research analysis pointed out that the trading volume of Bitcoin spot and futures markets continues to shrink, and even a small impact is enough to cause excessive price fluctuations in low liquidity.

The contraction of Bitcoin liquidity can be observed from multiple dimensions. The first is the trading volume data, where Bitcoin’s recent average daily trading volume is significantly lower than its peak in 2025, which means fewer market participants and thinner buy and sell depth. This is followed by the order book structure, where the spread between large buy and sell orders widens, indicating a decrease in market makers’ willingness to provide liquidity. The third is the open interest and funding rate in the derivatives market, both of which are relatively low, reflecting a decrease in speculative activity.

This thin liquidity market structure makes Bitcoin extremely sensitive to external shocks. When liquidity is abundant, a $1000K sell order may only cause a price impact of 0.5%; But when liquidity dries up, a sell order of the same size can trigger a 2-3% decline. This non-linear price shock is the core mechanism of this plunge.

More worryingly, the depletion of Bitcoin liquidity has created a vicious cycle. Reduced liquidity has led to increased price volatility, which in turn scared away more market makers and stable investors, further reducing liquidity. This “liquidity spiral” makes the market extremely vulnerable, and any negative news can trigger a chain reaction.

Stocks and commodities quickly rebounded after a brief cut, but Bitcoin failed to follow suit. This divergence clearly demonstrates the impact of liquidity disparities. Traditional asset markets have deep institutional participation and market maker networks, and when prices oversell, dip buying will quickly enter the market to drive a rebound. However, the Bitcoin market currently lacks this stabilizing force, making it easy to fall and difficult to rebound.

Microsoft’s earnings report hit the active realized price

Bitcoin began to come under pressure on January 29, triggered by a sharp decline in the Nasdaq index. Microsoft’s fourth-quarter earnings report fell short of expectations, especially the growth rate of cloud service Azure decreased by 1% quarter-on-quarter, once again igniting market concerns about an excessive bubble in AI-related investments. As panic spread, investors began to reduce their positions in risky assets. Bitcoin itself is highly volatile, with particularly sharp declines.

The key to this decline is the price at which Bitcoin has fallen. In the middle of the decline, it broke through an important structural support - the active realized price. At that time, this level was held near $87,000. The active realized price is an on-chain metric that excludes long-term unused positions and instead calculates the average cost based on tokens that are actively circulating in the market.

In other words, the active realized price is the break-in for investors who are currently trading. Once it falls, most active participants fall into losses at the same time. And Bitcoin simply broke through this line. The psychological pressure on the journey from $87,000 to $81,000 has been further fueled by the willingness to sell as countless traders who have entered positions at high levels have been forced to suffer floating losses.

From the perspective of market psychology, the breakdown of the active realized price has the characteristics of self-reinforcement. When the price falls below this level, short-term holders lose money across the board, their risk tolerance decreases, and they are more likely to panic sell in the event of further declines. This mechanism has shifted from support to resistance at $87,000, and the price will face significant pressure from “unarbitrage” to regain this level.

Bitcoin’s lack of liquidity has greatly amplified the impact of this technical break. In a liquid market, a “false breakdown” covering market often occurs quickly after falling below key support, as a large number of algorithmic trading and institutional buying will ambush near technical levels. However, the current market lacks this buffer mechanism, and the technical breakdown directly evolves into a trend decline.

The Walsh effect triggered a liquidity tightening panic

On January 29, around 8 p.m., Bitcoin experienced another sharp decline, rapidly dropping from $84,000 to $81,000. Bloomberg and Reuters reported that President Trump is preparing to nominate Kevin Walsh as the next Fed chairman, officially announcing it on January 30.

Kevin Walsh is generally seen as a hawk in the market. During his tenure as a Fed governor from 2006 to 2011, he was opposed to quantitative easing and warned of the risks of inflation. When the Fed launched the second round of quantitative easing in 2011, Walsh immediately resigned. Speculation about Walsh’s nomination was interpreted as contrary to Trump’s intention to cut interest rates, which immediately raised market concerns about tightening liquidity.

Cryptocurrencies have historically performed well when liquidity is abundant – when investors are willing to allocate more money to high-risk assets. The prospect of Walsh at the helm of the Fed has spread fears of tightening liquidity. In a market where Bitcoin liquidity is already tight, investors immediately began to sell.

Comparison of the driving factors of the two rounds of decline

Round 1 (Microsoft earnings report): Technology stock bubble concerns, risk assets are generally sold off

Round 2 (Walsh Effect): Monetary policy tightening expectations intensified liquidity panic

common ground: over-magnified in a market with thin liquidity

However, market concerns about Walsh’s hawkish reputation may be excessive. In a Wall Street Journal op-ed, Walsh proposed a compromise idea: limited interest rate cuts combined with balance sheet contraction. This framework attempts to find a balance between Trump’s willingness to cut interest rates and Walsh’s inflation discipline. The implication is that the overall trend is still hawkish, but the interest rate trend retains some room for flexibility.

Therefore, the total number of rate cuts may be less than during the Powell administration, but a return to full-scale tightening is unlikely. Even if Walsh becomes chairman, the Fed is expected to maintain the basic direction of gradual easing. This means that while the Bitcoin liquidity environment will not improve significantly, it will not deteriorate to the extent of the 2022 interest rate hike cycle.

Medium and long-term liquidity prospects and institutional accumulation

Currently, the market is avoiding Bitcoin. Trading volume continues to contract, selling pressure continues, and the price rebound is becoming more and more unsustainable. In the short term, uncertainty remains. Bitcoin is likely to continue to follow the rise and fall of the stock market. With $80,000 already broken, further downside risks cannot be ruled out.

However, once the stock market turns to consolidation, Bitcoin may once again become a favored alternative investment tool in the market. From historical experience, whenever technology stocks stagnate due to bubble concerns, funds tend to rotate into alternative assets. The improvement in Bitcoin liquidity may come from this capital rotation.

At the same time, the SEC and the CFTC’s crypto-friendly policies are gradually being implemented. Allowing crypto investments to be included in 401(k) retirement accounts would open the floodgates for potential inflows of up to $1 trillion into the market. This structural liquidity improvement will fundamentally change the depth and stability of the Bitcoin market.

What is truly unchanging is precisely what is more important. Looking at the longer-term time dimension, global liquidity continues to expand, and institutional policy stance on cryptocurrencies remains firm. Strategic accumulation at the institutional level is still progressing in an orderly manner, and the Bitcoin network itself has not experienced any operational problems.

The current pullback is just a short-term excessive volatility caused by thin liquidity, and has not shaken the foundation of a medium- to long-term bullish trend. When Bitcoin liquidity gradually recovers and the active realized price becomes support rather than resistance, the market will reassess its value. Before that, investors need to adapt to this highly volatile and illiquid market environment, or choose to wait for clearer signals.