Why Bitcoin Plunged Below the Eighty-Seven Thousand Level: A Market Liquidity Crisis

On January 29, Bitcoin faced a stunning reversal, dropping from price levels near eighty-seven thousand dollars to below $81,000 in a matter of hours. The decline that followed was even more severe—by February, the cryptocurrency had tumbled further to $65.56K, representing a catastrophic correction from those late-January peaks. Yet what makes this downturn particularly puzzling is that while traditional markets recovered quickly, Bitcoin remained stuck in a liquidity drought.

Tiger Research’s latest analysis reveals a critical insight: Bitcoin’s failure to rebound mirrors a fundamental shift in market dynamics. This wasn’t simply a price correction—it was a liquidity crisis masquerading as one, triggered by multiple shocks to the financial system that fundamentally altered investor sentiment.

The Liquidity Drought That Caught Everyone Off Guard

Bitcoin’s journey from the eighty-seven thousand mark represents more than just another volatile swing. The cryptocurrency plummeted through critical technical support levels that typically act as buyer strongholds. What alarmed traders most was the collapse of the active realized price—a measure of the average purchase cost for currently active market participants.

This level, maintained around $87,000, functions as the breakeven point for traders holding positions. When Bitcoin pierced through it with minimal resistance, the psychological impact was severe. The surge in selling pressure wasn’t random; it reflected a systematic liquidation pattern as active market participants found themselves underwater simultaneously.

The underlying culprit? Evaporating trading volume. Both spot and futures markets experienced a dramatic contraction in activity. In such a liquidity-starved environment, even modest negative catalysts can trigger disproportionate price movements. Spot traders found it increasingly difficult to exit positions, while futures markets experienced cascading liquidations that accelerated the downward spiral.

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The initial catalyst emerged on January 29 when Microsoft reported disappointing fourth-quarter earnings. The shortfall reignited simmering concerns about whether the artificial intelligence investment boom had exceeded reasonable valuations. The Nasdaq index responded sharply to the news, creating panic across risk assets.

Bitcoin, with its inherent volatility and sensitivity to risk sentiment, bore the brunt of this sell-off more severely than other markets. The cryptocurrency’s sharp decline—approximately 7% from $87,000 to $81,000 in roughly 24 hours—reflected both the Nasdaq’s weakness and Bitcoin’s amplified response to risk-off sentiment.

What made this particularly damaging was the price level where the decline halted. Bitcoin broke through the critical support zone that had guided risk-taking behavior. With the $87,000 level definitively breached, new sellers emerged at increasingly lower prices, transforming the selloff into a self-reinforcing cycle of forced liquidations.

The Walsh Effect: Fed Policy Uncertainty Deepens the Pressure

Hours after the initial decline, a second shock struck markets. Bloomberg and Reuters reported that President Trump intended to nominate Kevin Walsh as the next Federal Reserve chairman, with formal announcement expected on January 30. The market’s reaction was swift and brutal.

Walsh’s track record fueled concerns about potential monetary tightening. During his tenure as a Federal Reserve governor from 2006 to 2011, he openly opposed quantitative easing measures and warned persistently about inflation risks. When the Federal Reserve announced its second round of quantitative easing in 2011, Walsh promptly resigned—a dramatic gesture that market participants interpreted as a harbinger of hawkish future policies.

Bitcoin crashed from $84,000 to $81,000 within hours as traders absorbed the implications. The cryptocurrency market has historically thrived on abundant liquidity; when investors possess easy access to capital, they willingly allocate it toward higher-risk assets like Bitcoin. The prospect of a hawkish Fed chairman steering toward potential tightening triggered panic about a liquidity squeeze.

The Missing Piece: Why Others Recovered but Bitcoin Didn’t

As volatility subsided and stock markets entered consolidation phases, equities and commodities staged recovery rallies. Yet Bitcoin remained mired in a deflationary spiral. The divergence reveals a critical distinction: traditional assets possess deeper liquidity pools and broader institutional participation that naturally stabilizes prices during volatility events.

Bitcoin’s thinner order books meant that selling pressure—whether from retail panic or institutional rebalancing—created cascading sell-offs with limited natural support. The cryptocurrency market’s structural fragility, when combined with shrinking trading volumes, created conditions where price discovery became increasingly difficult.

Is the Walsh Nightmare Realistic? Policy Nuance Suggests Otherwise

Market fears about extreme Walsh-driven tightening may prove exaggerated. In a Wall Street Journal column, Walsh himself outlined a potential compromise framework: limited interest rate cuts paired with balance sheet contraction. This balanced approach attempts to reconcile Trump’s desire for monetary accommodation with Walsh’s inflation discipline.

The practical implication: while total rate cuts may fall short of Powell-era levels, the likelihood of returning to aggressive tightening appears remote. The Federal Reserve’s direction is expected to remain gradualist, preserving at least some degree of monetary accommodation even under a Walsh-led institution.

Meanwhile, regulatory developments continue supporting cryptocurrency adoption. The SEC and CFTC have implemented increasingly favorable policies toward digital assets. The recent allowance for cryptocurrency investments within 401(k) retirement accounts alone could unlock up to one trillion dollars in potential institutional capital inflows—a transformation that would fundamentally alter Bitcoin’s liquidity profile.

Digital asset market structure legislation advances rapidly, further legitimizing the cryptocurrency ecosystem. These developments operate independently of Fed policy uncertainties, providing structural support for medium-term crypto asset demand.

From Crisis to Opportunity: The Medium-Term Backdrop Remains Constructive

Yes, Bitcoin has plunged from the eighty-seven thousand dollar levels to $65.56K, representing a brutal correction over the past two weeks. Short-term risks persist—the $80,000 support has already been breached, and technical analysis suggests further downside cannot be dismissed out of hand.

However, examining the situation with a longer time horizon reveals a contrasting narrative. Global liquidity continues expanding despite Fed uncertainties. Institutional capital allocation toward crypto remains orderly and consistent. Bitcoin’s network continues operating without technical issues or security concerns.

The pullback that dragged Bitcoin below the eighty-seven thousand mark reflects excessive volatility driven by thin liquidity conditions. It does not indicate deterioration in the medium-to-long-term fundamentals supporting the Bitcoin thesis. Historically, whenever technology stock appreciation slows due to valuation concerns, capital systematically rotates into alternative assets—categories where Bitcoin naturally resides.

The Verdict: Short-Term Volatility Versus Long-Term Trends

The sharp decline from January’s eighty-seven thousand dollar peaks to current $65.56K levels tells a story of liquidity-driven volatility rather than fundamental deterioration. While immediate downside risks warrant caution, the structural factors supporting Bitcoin adoption continue strengthening. Regulation advances, capital access expands, and institutional positioning steadily accumulates.

Bitcoin’s failure to rebound alongside other assets revealed structural market conditions—not a broken cryptocurrency. As markets transition from panic to consolidation, Bitcoin’s alternative-asset status should reignite investor interest. The current downturn represents a buying opportunity for patient capital rather than a warning sign about Bitcoin’s long-term trajectory.