Why is Bitcoin crashing?

Bitcoin's most recent fall was arguably due to Kevin Warsh's confirmation as Federal Reserve Chair, replacing Jerome Powell in the near future. 

But the deeper story is about what Warsh represents, and what his appointment means for the easy monetary conditions that have underwritten every major Bitcoin rally since 2020.

When Treasury Secretary Scott Bessent announced five finalists for Fed Chair last year, crypto markets were pricing in a best-case scenario. Kevin Hassett, Trump's National Economic Council director and a vocal advocate for aggressive rate cuts, was the favorite. The narrative was simple: Trump wanted low rates, Hassett would deliver them and crypto would ride the liquidity wave higher.

Then Warsh got the job.

Markets immediately remembered who Kevin Warsh actually is. During his tenure as Fed Governor from 2006 to 2011, he built a reputation as one of the most hawkish voices in the Federal Open Market Committee. While others on the FOMC spoke for quantitative easing and slashing rates to zero during the financial crisis, Warsh was often the dissenting voice, warning about asset bubbles, moral hazard and the long-term consequences of ultra-loose monetary policy.

His concerns proved well-founded. The Fed's emergency measures arguably did create asset bubbles, encourage excessive risk-taking and expanded the central bank's role far beyond its traditional mandate.

However, Warsh's hawkish instincts are exactly what crypto bulls didn't want to see at the Fed's helm.

Trump positioned Warsh as an independent inflation hawk who would pursue sound monetary policy. The markets sold that narrative. Gold crashed from $5,600 to around $4,700. Silver plummeted from more than $120 to below $80 and Bitcoin ultimately broke below the psychologically critical $80,000 level.

The selloff reflects a market assuming that while Warsh might deliver some rate cuts in the near term, the terminal rate will almost certainly be higher under Warsh than it would have been under a true dove like Hassett. And perhaps more importantly, if inflation resurges (entirely possible given Trump's tariff policies and fiscal expansion plans), Warsh is seen as someone who will prioritize price stability over growth.

For Bitcoin, this is not ideal. 

The cryptocurrency thrives in environments of monetary excess. When real interest rates are negative, when central banks are printing money and when faith in fiat currencies erodes, that's when Bitcoin shines. But in an environment of higher-for-longer rates and a Fed Chair with genuine anti-inflation credentials? The opportunity cost of holding a non-yielding asset rises.

Warsh's appointment has also sent the dollar higher. When markets anticipate higher interest rates, foreign capital floods into dollar-denominated assets, the greenback strengthens, and then since Bitcoin is priced in dollars globally, a stronger dollar makes it mechanically more expensive for international buyers and reduces its appeal as a currency hedge.

This creates a feedback cycle. As the dollar rises, Bitcoin's dollar price falls. As Bitcoin's price falls, leveraged positions get liquidated. As liquidations cascade, the selling pressure intensifies. Technical traders who were long Bitcoin based on momentum hit their stop-losses. Retail investors who bought the Trump narrative start getting itchy fingers. 

And suddenly you're below $80,000 wondering where the floor might be.

A perfect storm?

Bitcoin's crash isn't just about Warsh. It's also about market structure, leverage and a convergence of unfavorable macro conditions hitting simultaneously.

Throughout late 2024 and early 2025, as Trump's pro-crypto stance became clear and spot Bitcoin ETFs continued pulling in institutional capital, traders piled into leveraged long positions. Futures open interest hit record highs. Funding rates on perpetual swaps signaled extreme bullishness. 

When Warsh's appointment shattered that consensus, the leverage unwind was quick. Each liquidation triggered more selling, creating a self-reinforcing cascade.

As the selloff accelerated, long liquidations piled up. Billions in notional value were wiped out in days. And while some of this represented genuine losses, much of it was simply leverage being flushed from the system, a necessary but painful reset.

Beyond leverage, Bitcoin is facing headwinds from multiple directions. Inflation data is running hot. December's Producer Price Index came in at 3.0%, above expectations of 2.7%. Core PPI rose to 3.3%, the highest level since July 2025. Month-over-month figures were even worse: 0.5% versus expectations of 0.2% for headline PPI, and 0.7% versus 0.2% for core.

This is the data environment Warsh will inherit. If he genuinely believes the Fed was too late to hike in 2022 (which he has stated publicly), and if inflation continues running above target, his historical hawkish instincts could resurface regardless of Trump's preferences for lower rates.

Geopolitical tensions are also escalating in ways that hurt risk assets rather than help them. Trump's chaotic January including Venezuela, Greenland and simmering tensions with Iran over the Strait of Hormuz have also created uncertainty. But it's the wrong kind of uncertainty.

Typically, geopolitical chaos benefits safe-haven assets like gold. Bitcoin bulls have long argued that their asset occupies similar safe-haven status. But Bitcoin's recent price action suggests otherwise. When macro uncertainty combines with tightening liquidity conditions, Bitcoin trades more like a risk-on tech stock.

The long game

The case against Bitcoin in the near term appears strong. Higher real rates, dollar strength, leverage unwinding and a Fed Chair with hawkish credentials all point to continued downside.

But the long-term case? That hasn't changed at all.

The United States is drowning in $38.6 trillion of debt. The debt-to-GDP ratio exceeds 120%, levels previously seen only during World War II. Annual interest payments now exceed $1 trillion; more than the defense budget, more than Medicare. The Congressional Budget Office projects debt will reach 166% of GDP by 2054.

The country faces three increasingly incompatible objectives: maintaining the dollar's global reserve status (which requires confidence in US fiscal stability), servicing the debt at current levels (which requires low interest rates), and controlling inflation (which requires high interest rates).

Arguably, you cannot achieve all three simultaneously.

Kevin Warsh might intellectually believe in sound money and Fed independence. But if Treasury auctions start failing or a recession hits and the government lacks the fiscal space to respond, the Fed's hand will be forced.

Bitcoin's supply is capped at 21 million. No Fed Chair, no matter how hawkish, can change that. No government, no matter how desperate, can print more Bitcoin to service debt.

If Warsh genuinely tries to maintain hawkish policies in the face of what many feels are unsustainable debt dynamics, one of two things happens. Either he succeeds in keeping rates high, which causes a debt crisis or severe recession that forces a policy U-turn (bullish for Bitcoin as a hedge against policy failure), or he fails to maintain hawkish policies because political pressure and fiscal reality force accommodation (bullish for Bitcoin as a hedge against monetary debasement).

Potentially, the only scenario where Bitcoin loses long-term is if Warsh manages to keep inflation low, growth stable, markets calm, and debt sustainable all while maintaining Fed independence and dollar credibility. That’s a difficult task.

The Warsh appointment might have shattered near-term hopes for aggressive easing. But it hasn't solved the fundamental problem: governments have made promises they cannot keep without either dramatically raising taxes, slashing benefits or inflating away obligations.

Bitcoin was built for this environment. The crash below $80,000 is painful, yes. But for many investors who spent 2025 hoping for a cheaper buy-in price, it may look like an entry.

Of course, BTC may yet have further to fall.

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