Enter: Kevin Warsh

After a relatively steady January where Bitcoin (CRYPTO: BTC) outperformed traditional safe-havens like gold, toward the end of the month, Bitcoin started to face significant weakness. This volatility skyrocketed over the past week, but why? Did anything fundamentally change with Bitcoin?

Starting from its Jan 30th close near $82,000 (right after Kevin Warsh was nominated as Fed chairman), Bitcoin would end up plunging over 25% into yesterday's close on Thursday and show the most oversold levels since 2018.

Several factors likely contributed to the move:

• Kevin Warsh's nomination reinforced hawkish expectations
• The 10-year Treasury yield rose to 4.35%, strengthening the dollar
• Soft labor data increased recession concerns
• Correlated selling in risk assets like $IGV
• A cascade of leverage-driven liquidations in crypto markets

Importantly, none of these altered Bitcoin's underlying mechanics.

But did anything fundamentally change with Bitcoin's bull case?

Our opinion: not at all. This dip was for buying, not selling.

Bitcoin's wild ride since the end of January.

A Dove in Disguise?

Kevin Warsh has surely been a Fed critic and generally a hawk in his private life. But how much hawkishness with interest rate policy is even possible, let alone plausible (given the FOMC is a committee)?

The average interest rate on the outstanding marketable debt is 3.3%, and there is nowhere on the curve that can be issued below that, meaning our $1.2 trillion annual interest bill can only increase, of course, thereby pressuring the fiscal deficit. Interest rates must be cut to stop the interest expense, which is growing at 15% annually, and the fastest growing federal outlay. In fact, Warsh has started laying the groundwork for this already, noting the sky-high productivity from AI would allow lower interest rates (without increasing inflation).

Regarding the balance sheet, there is almost no world where Kevin Warsh is able to take the Fed's balance sheet to $3.5 trillion (as he has discussed years ago as a target). This would require a huge reduction in Fed liabilities, which offer no viable options-

1. Bank reserves are already showing signs of scarcity and causing issues in the repo market (where the heavily levered ‘basis trade' is financed, that basis trade being a hugebuyer of US Treasuries, absorbing ~40% of new issuance since 2022 per a Fed report).
2. The Treasury General Account ("TGA") offers a potential option, but the TGA balance must remain high to serve as a reasonable buffer against disruption. Remember, nearly $620 billion worth of US Treasury redemptions occur every week.

Needless to say, fiscal dominance didn't disappear. The train didn't suddenly grow brakes.

Recession = …Bullish??

The potential for a recession is indeed a real question and a real potential threat, but only short-term. If the US were to experience just a garden variety recession, we could expect a 600-900bps increase in the fiscal deficit as expenditures rise and revenues plummet. This would take the fiscal deficit to a whopping 15% of GDP, certainly requiring a huge increase in liquidity and the Fed's balance sheet.

While a recession could be painful in the short-term, those with a longer time horizon would likely benefit from buying that dip…

Leverage will always plague the broader crypto space, and bitcoin is no different. However, as we saw on Friday, that leverage works both ways, with $212 million worth of liquidations of shorts into close on Friday. For those with a longer time horizon, this short-term, leverage-driven volatility can largely be looked at as an opportunity.

To sum things up, nothing changed. If one were bullish on bitcoin at $80,000 or $90,000, this was a massive discount on the same underlying asset. We aggressively bought all the way down and will continue to add heavily if we see further weakness because nothing changed.

When you zoom out, nothing fundamental actually changed for Bitcoin.

Volatility spiked, leverage got washed out, and positioning reset — but the macro backdrop stayed the same.

Price moved quickly, not the thesis.

Thanks for reading! Catch you in the next one!

For more updates throughout the week, follow @WOLF_Bitcoin

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

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