Bitcoin steadied around the high-$70,000s in early February after a sharp selloff that briefly pushed it below $80,000, as traders re-priced the outlook for U.S. monetary policy and liquidity conditions. On Saturday, January 31, 2026, Bitcoin was down 6.53% at $78,719.63 (12:48 p.m. ET), extending a drop that began as markets reacted to President Donald Trump selecting Kevin Warsh as his pick to lead the Federal Reserve.

Reuters reported Bitcoin fell as low as $81,104 the prior day—its weakest level since late November—while the U.S. dollar gained, reflecting investor concern that a Warsh-led Fed could be tougher on “excess cash” in the system.

At the same time, Washington’s regulatory backdrop remains unresolved. A White House meeting intended to bridge differences between banks and crypto firms over digital-asset legislation ended without a breakthrough, keeping “rules clarity” (especially around stablecoin rewards/interest) in limbo.

Background Context

This episode is less about a single headline and more about what the crypto market has quietly relearned since 2022: liquidity regimes matter.

Warsh is associated—fairly or not—with a policy instinct that emphasizes a smaller Fed footprint. Reuters notes Warsh has argued that the Fed’s “bloated” balance sheet can be reduced materially, but it also highlights a key constraint: shrinking the balance sheet in a system that runs on abundant bank reserves is hard, slow, and potentially destabilizing if pushed too aggressively.

The numbers explain why the debate is so sensitive. Reuters reported the Fed’s balance sheet peaked around $9 trillion in 2022 after pandemic-era asset buying, then fell to about $6.6 trillion by late 2025 via quantitative tightening (QT). In December 2025, the Fed began technical Treasury bill purchases to ensure sufficient liquidity and maintain control of short-term rates—an important reminder that “QT forever” is not how the plumbing works in practice.

Crypto traders care because Bitcoin has often acted like a high-beta “liquidity thermometer”: it tends to thrive when financial conditions are easing and leverage is easy, and it tends to suffer when markets start worrying about tighter funding, higher real yields, or a stronger dollar. Reuters framed this directly: Bitcoin and other speculative assets have been viewed as beneficiaries of a large Fed balance sheet and abundant liquidity.

For readers who want the building blocks, see our explainers on Quantitative Tightening (QT), the U.S. Dollar Index (DXY), and financial conditions.

Why This News Matters

1) Crypto is trading “macro plumbing” again—not just narratives.
Bitcoin’s drop wasn’t triggered by a hack, a protocol failure, or an exchange blow-up. It was triggered by shifting expectations about how the Fed might manage the cost of money and the quantity of money (rates vs. balance sheet). Reuters explicitly tied the selloff to concerns that Warsh might tighten cash in the financial system and favor a smaller balance sheet.

2) A smaller balance sheet can be hawkish even if rates fall.
Here’s the nuance most traders miss: rate cuts and balance-sheet contraction can push in opposite directions. Reuters reported investors were weighing how Warsh’s past hawkishness might mesh with Trump’s push for lower rates, while also expecting Warsh to rein in the balance sheet.
Translation: Bitcoin can’t just celebrate “cuts” if the market simultaneously prices a tighter liquidity backdrop.

3) Correlation risk is rising across “risk assets.”
Reuters also flagged that broader risk sentiment—like fears around AI exuberance and mega-cap volatility—contributed to the selloff, showing crypto is still plugged into the same risk-on/risk-off power grid as equities.
That matters for portfolio construction: if BTC trades more like a high-volatility macro asset, diversification benefits can shrink right when you want them most.

4) Regulatory uncertainty remains a volatility multiplier.
Policy clarity is the other half of the crypto risk premium. The White House-hosted meeting failing to resolve bank–crypto disagreements—especially on stablecoin interest/rewards—signals that U.S. rules may still arrive with compromises that reshape product economics.
For context, you can read the UK government’s direction of travel on crypto regulation (as a parallel framework) via the official announcement: UK crypto rules to unlock growth and protect customers.

Our Expert Take

The market’s message is blunt: Bitcoin is being repriced as a “liquidity-sensitive asset” first, and a “tech/alternative store of value” second—at least in the short run.

What we think is really happening

The Warsh headline mattered because it re-opened a question traders had tried to ignore: Does the next Fed regime prioritize cheaper money, or less money? Reuters’ reporting suggests many investors expect Warsh to be inclined toward lower rates while also seeking a smaller balance sheet—an inherently tension-filled mix that can produce higher term premium, a firmer dollar at the margin, and faster swings in risk appetite.

Two forward-looking scenarios we’re watching

Scenario A: “Pragmatic QT” + stable rates path → BTC bases, then trades technicals.
Reuters notes analysts believe major balance-sheet changes would likely be slow-moving and mindful of market stability, and that banks’ reserve demand limits how far the Fed can shrink without causing money-market stress.
If that pragmatism becomes the consensus, Bitcoin’s next driver is likely to be positioning and technical levels rather than a macro panic bid for USD.

Scenario B: Policy uncertainty + legislative stalemate → volatility stays elevated.
If nomination proceedings get delayed and the market starts gaming Fed independence headlines, macro volatility can bleed into crypto. Reuters reported Democratic senators sought a delay in Warsh nomination proceedings amid a broader dispute tied to Fed investigations and independence concerns.
Layer on a U.S. crypto bill process that still can’t reconcile stablecoin reward rules, and you get a market with two uncertainty engines running at once: macro and regulatory.

Practical takeaway for traders (without pretending to “predict prices”)

In this regime, the edge is less about bold directional calls and more about mapping the drivers:

  • If DXY and long-end yields rise together, crypto usually feels it first.
  • If the policy mix implies cuts + balance-sheet restraint, expect choppy rallies rather than straight-line uptrends.
  • Watch policy text, not just speeches—especially anything that changes the economics of stablecoin rewards and exchange incentives. (See our Stablecoins guide and spot market structure primer.)