In the past few days, a significant sell-off hit the cryptocurrency markets, bringing Bitcoin (BTC) down to its lowest value since November 2024.

According to Binance Research, the downturn was primarily triggered by the news of Kevin Warsh being nominated to head the Federal Reserve. The market interpreted Warsh’s historical views as a potential indication of stringent liquidity measures, prompting a wave of deleveraging.

However, Binance Research contends that such reactions may be exaggerated, as structural limitations within the financial ecosystem could hinder the severe balance sheet contraction that people are fearing.

Liquidity Crisis at the Supply Chain’s End

Binance analysts, including Michael JJ, noted that last week’s market volatility exhibited classic characteristics of a liquidity crisis. The aftermath of disappointing earnings from major tech companies like Microsoft, along with increasing geopolitical tensions, triggered a flight from risky assets following Warsh’s nomination — a nominee known for advocating a cut in the Fed’s bond holdings.

Traders faced margin calls and were compelled to sell their most liquid assets to secure cash, resulting in highly increased trading volumes in precious metals, which soared to over ten times the usual levels as the U.S. dollar sharply climbed. Furthermore, data highlighted by blockchain analysts pointed to cryptocurrencies being at the end of the liquidity chain, making them the first assets to be liquidated when cash was urgently needed elsewhere.

When gold prices dipped, cryptocurrencies followed suit; conversely, when gold rallied, digital assets continued to decline alongside the stock market, reaffirming their low priority in liquidity tiers. Throughout this period, Bitcoin broke through several crucial technical support levels, including the head-and-shoulders neckline and essential moving averages, dropping to an intraday low near $73,000 on February 4.

Are QT Concerns Overstated?

A key point in Binance Research’s argument is that markets might be overvaluing the risks associated with Quantitative Tightening (QT) under Warsh’s probable chairmanship. Despite Warsh’s inclination to reduce the Fed’s balance sheet, the report identifies technical barriers that could complicate aggressive contraction.

For instance, the Fed’s reverse repo system is nearing a critical depletion point, meaning any future QT would directly drain bank reserves and might drop them beneath mandated minimums, potentially igniting a repo market crisis reminiscent of the one that occurred in 2019.

Additionally, the U.S. Treasury’s requirement to issue approximately $2 trillion in new debt annually necessitates buyers. If the Fed recedes as a net buyer through QT, the private sector will have to manage this extra supply, which could stress markets.

The research indicates that without modifications to banking regulations, like exempting Treasuries from specific capital ratios, the financial system won’t support Warsh’s historically favored balance sheet reductions.

As a conclusion, such regulatory adaptations are anticipated to be more of a long-term consideration rather than an immediate danger.

The report also highlighted that the resolution of a recent U.S. government shutdown on February 3 should be seen as a favorable development, eliminating a source of immediate policy ambiguity and ensuring federal agencies remain funded until September 2026.