Crypto Market Macro Research Report: Under the Walsh Effect, a Tightening Cycle is Coming, How Will Crypto Assets Be Priced?

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In early February 2026, Trump nominated former Federal Reserve Governor and hawkish monetary policy figure Kevin Warsh as the next Federal Reserve Chairman. This appointment triggered severe turmoil in global financial markets, a phenomenon the crypto market termed the "Warsh effect." Major cryptocurrencies experienced significant declines, with the Bitcoin ETF seeing a net outflow of nearly $1 billion in a single day. Our in-depth analysis suggests that the essence of the Warsh effect is a "shift in the anchor point" of the market's perception of the underlying logic of monetary policy—from the old narrative of "continuous inflation driving fiat currency devaluation, with crypto assets benefiting as a store of value," to a new paradigm of "interest rate discipline strengthening the dollar's credibility, and liquidity contraction punishing risky assets." In this paradigm shift, the pricing mechanism of crypto assets is undergoing structural reconstruction: Bitcoin's correlation with tech stocks continues to strengthen, forcing it to accept a "high-beta risk factor" designation; the valuation driver of the entire market shifts from liquidity expansion to real interest rate pricing; and a sharp differentiation will emerge within the market, with assets possessing real cash flow and practical applications receiving valuation premiums. Looking ahead, crypto assets may evolve into "non-sovereign digital collateral" rather than traditional safe-haven assets. Investors need to systematically adjust their asset allocation framework, viewing cryptocurrencies as a "high-beta risk factor" that is highly sensitive to macro liquidity, and placing greater emphasis on fundamental analysis, risk management, and liquidity reserves during tightening cycles.

Chapter 1: The Walsh Effect Analysis – Why Does a Personnel Appointment Trigger a Market Seismic Event?

On January 30, 2026, a personnel appointment triggered a tsunami-like shock in global financial markets, its impact even surpassing the release of most economic data and adjustments to monetary policy. Following the news that former Federal Reserve Governor Kevin Warsh had been nominated as the next Federal Reserve Chairman, the US dollar index surged violently, gold and silver prices plummeted, and the cryptocurrency market suffered a bloodbath—Bitcoin fell by about 7% in a single day, Ethereum plunged by more than 10%, and the entire market capitalization evaporated by over $800 billion. On the surface, this appears to be a normal personnel change, but deeper analysis reveals that the market reaction was so intense because Warsh's nomination touched upon the most sensitive nerve of the current financial system. Kevin Warsh is no ordinary Federal Reserve official; his career trajectory and policy stance constitute a complete hawkish profile. In 2006, at only 35 years old, Warsh became the youngest governor in the history of the Federal Reserve, an appointment that itself foreshadowed his extraordinary potential. Amid the tumultuous 2008 global financial crisis, while most of his colleagues advocated for aggressive quantitative easing to rescue the collapsing financial system, Warsh became one of the most vehement dissenters. He not only publicly opposed a second round of quantitative easing (QE2), but also repeatedly warned in his post-crisis reflections that large-scale asset purchases and prolonged zero-interest-rate policies were distorting market signals, creating moral hazard, and damaging long-term price stability. These views seemed out of place in the crisis atmosphere at the time, but over time, more and more people began to re-examine his warnings. After leaving the Federal Reserve, Warsh further refined his theoretical framework through his academic work at the Hoover Institution and Stanford Graduate School of Business. He particularly emphasized the importance of the "real interest rate" as an anchor for monetary policy, arguing that negative real interest rates are a punishment for savers and an encouragement of capital misallocation. In a public speech in 2025, he explicitly stated: "A healthy economy needs positive real interest rates as a signaling mechanism for resource allocation; artificially suppressed interest rates only create false prosperity and an inevitable bursting of bubbles." These remarks stand in direct and sharp opposition to the current liquidity environment upon which the crypto market depends.

The most profound revelation of the Walsh effect lies in its exposure of a long-neglected contradiction between the crypto market and monetary policy. The original narrative of cryptocurrencies was built on the fight against central bank monetary bloat, a stance clearly demonstrated by Satoshi Nakamoto's statement in the Bitcoin genesis block that "the Chancellor is on the verge of implementing a second round of emergency banking assistance." However, as the crypto market matured, it did not become a completely independent parallel financial system from the traditional system, as early idealists envisioned. Instead, it became increasingly integrated into the existing system, developing a structural dependence on it. The approval of a Bitcoin spot ETF was a milestone in this process: it opened the door for institutional funds to enter the crypto market, but it also meant that the pricing power of crypto assets shifted from the decentralized community to Wall Street trading desks. Today, the price of Bitcoin is determined not by miners, holders, or developers, but by asset allocation models and risk management systems like BlackRock and Fidelity. These models naturally categorize crypto assets as "high-growth tech stocks" or "alternative risk assets," and their buying and selling decisions are based on the same macroeconomic variables as traditional assets—interest rate expectations, liquidity conditions, and risk appetite. This structural dependence makes the crypto market exceptionally vulnerable to hawks like Warsh, as institutional investors mechanically adjust their positions based on interest rate expectations, without considering Bitcoin's narrative of being a "non-sovereign store of value." It's a cruel irony: an asset created to counter central banks ultimately has its price determined by traditional institutions most sensitive to central bank policy.

Chapter 2: Historical Backtesting of Tightening Cycles – How Are Crypto Assets Priced?

To truly understand the profound implications of the Walsh effect, we need to look to history and examine the performance patterns of crypto assets during various tightening cycles. This historical backtesting is not simply a matter of data aggregation, but rather an attempt to extract structural patterns from past price fluctuations to provide a framework for judging the potential direction of the current market. The first period worthy of in-depth analysis is the balance sheet reduction and interest rate hike cycle of 2017-2018. The Federal Reserve officially began reducing its balance sheet in October 2017 and subsequently raised interest rates seven times over the next two years. Bitcoin's performance during this cycle exhibited a clear lag: in December 2017, when the Fed had already begun its rate hike process, Bitcoin instead reached an all-time high of $19,891, with the market completely ignoring the signals of monetary policy tightening and continuing to indulge in a frenzied bull market. However, this disregard ultimately came at a heavy price. As the pace of interest rate hikes accelerated and the scale of balance sheet reduction expanded in 2018, the continued contraction of liquidity finally overwhelmed the market. Bitcoin entered a 13-month bear market, falling to a low of $3,127, a drop of 84.3%. The lessons learned from this period are profound: the impact of monetary policy takes time to accumulate; the market may ignore tightening signals in the short term, but once a critical point is reached, the adjustment is often drastic and painful. More importantly, the 2017-2018 cycle also revealed a characteristic of the early crypto market—its relatively weak correlation with traditional financial markets, and its greater reliance on its own cycles (such as Bitcoin halvings) and retail investor sentiment.

The second key period is the inflation response cycle of 2021-2022, which is more comparable to the current environment. The Federal Reserve began tapering its bond purchases in November 2021 and raised interest rates for the first time in March 2022, totaling seven rate hikes of 425 basis points throughout the year. After reaching a peak of $69,000 in November 2021, Bitcoin fell to a low of $15,480 in November 2022, a drop of approximately 77%. Compared to the 2017-2018 cycle, the most important change in this period was the significantly enhanced correlation between the crypto market and technology stocks. Data shows that the 120-day rolling correlation between Bitcoin and the Nasdaq index surged from around 0.3 at the beginning of 2021 to 0.86 in mid-2022. This sharp increase in correlation is not accidental but reflects a structural change in the crypto market: a large influx of institutional investors who are managing crypto assets within a unified risk asset framework. When the Federal Reserve began aggressive interest rate hikes to combat inflation, institutional investors simultaneously reduced their holdings in tech stocks and crypto assets according to risk models, creating a vicious cycle of "multi-asset liquidation." Another important phenomenon emerged during this period: a sharp divergence within the crypto market. During the overall decline, Bitcoin showed relative resilience, while most altcoins suffered much steeper losses, with many tokens falling by more than 90%. This divergence indicated that the market was beginning to distinguish between "core assets" and "fringe assets," with funds concentrating on assets with better liquidity and stronger consensus.

The third period is the high-interest-rate maintenance phase of 2024-2025, which is the most recent and most relevant to our understanding. The Federal Reserve maintained the federal funds rate at 5.25%-5.50% for 16 months while continuing to shrink its balance sheet by $95 billion per month. During this period, the crypto market exhibited complex structural characteristics. On one hand, Bitcoin benefited from the approval of spot ETFs, experiencing a significant surge from $45,000 to over $100,000; on the other hand, most altcoins fell by 40-70%, and over 80% of the top 100 tokens by market capitalization underperformed Bitcoin. This divergence reveals an important trend: in an environment of overall tightening liquidity, funds tend to concentrate on the "safest risk assets"—those with the best liquidity, highest institutional acceptance, and lowest regulatory risk. Other crypto assets not only face the contraction of macro liquidity but also the "vampire effect" from Bitcoin. Another noteworthy phenomenon emerged during this period: changes in real interest rates began to directly impact crypto asset pricing. When the yield on 10-year Treasury Inflation-Protected Securities (TIPS) rose from 1.5% to 2.5%, the price of Bitcoin fell by about 15%, a sensitivity not typically seen in previous cycles.

Based on the experience of these three historical periods, we can summarize several key patterns in the crypto market during tightening cycles. First, the impact of monetary policy has a cumulative and lagging effect; the market may initially ignore tightening signals, but will eventually react with a sharp adjustment. Second, as institutional participation increases, the correlation between the crypto market and traditional risky assets strengthens, reaching extreme values ​​in a tightening environment. Third, significant market differentiation occurs, with funds concentrating on top assets, highlighting the Matthew effect. Fourth, accumulated leverage amplifies the magnitude and speed of declines, creating a vicious cycle of "price decline - triggering liquidation - further decline." Fifth, changes in real interest rates are increasingly becoming a core variable affecting crypto pricing; rising risk-free rates directly increase the opportunity cost of holding crypto assets. The unique aspect of the Warsh effect is that it occurs at the moment of highest institutionalization in the crypto market, and also at a relatively high market valuation. The combination of these two factors may make this adjustment more complex and prolonged than any previous one. Furthermore, Warsh's nomination, as a hawkish figure with a complete theoretical framework and consistent stance, may indicate that tightening policies are not temporary measures, but rather a long-term policy paradigm. The impact of this paradigm shift will far exceed that of cyclical policy adjustments.

Chapter 3: Crypto Market Pricing Models During a Tightening Cycle

In the new environment brought about by the Warsh effect, traditional crypto asset pricing models have become ineffective, necessitating a completely new analytical framework to understand market dynamics. Based on historical data and the current market structure, we have constructed a three-factor pricing model to explain the price formation mechanism of crypto assets during a tightening cycle. The first factor is liquidity conditions, with a weight of 40%. This factor measures the changing trend of global money supply, including indicators such as the size of the Federal Reserve's balance sheet, the global M2 growth rate, and the scale of overnight reverse repos. Data shows a strong correlation between changes in global liquidity and the market capitalization of crypto assets (R² = 0.62), with an average decrease of 2.1% in total market capitalization for every 1% contraction in liquidity. Under the policy framework that Warsh might implement, we expect the Federal Reserve's balance sheet to shrink by 15-20% over the next two years, equivalent to approximately $1.2-1.6 trillion. According to model calculations, this alone could cause the total market capitalization of crypto assets to shrink by 25-30%. More importantly, liquidity contraction often exhibits non-linear characteristics: the initial impact is limited, but when the contraction accumulates to a certain extent, it may trigger a positive feedback loop of liquidity crisis. The current leverage structure of the crypto market amplifies this vulnerability, with a large number of collateralized lending and derivatives positions facing liquidation pressures when liquidity tightens, further exacerbating the market downturn.

The second factor is the real interest rate, weighted at 35%. This factor measures the opportunity cost of holding crypto assets, with key metrics being the 10-year Treasury Inflation-Protected Securities (TIPS) yield and the real federal funds rate. For every 1 percentage point increase in the real interest rate, the risk premium required for Bitcoin needs to rise by 280 basis points to maintain its current valuation. This means that if the real interest rate rises from the current 1.5% to the 3% that Warsh might advocate, Bitcoin's expected annualized return would need to increase from the historical average of about 60% to nearly 70%, a considerably high threshold.

The third factor is risk appetite, weighted at 25%. This factor measures market participants' willingness to take risks, with key indicators including the VIX fear index, high-yield bond spreads, and technology stock valuation premiums. The crypto market is extremely sensitive to changes in risk appetite, with an elasticity coefficient of 1.8, meaning that when overall market risk appetite declines by 10%, crypto market valuations may decline by 18%. This disproportionate amplification effect stems from the high volatility and marginal status of crypto assets: in an optimistic market, investors are willing to take on higher risks to pursue potential returns; in a pessimistic market, crypto assets are often the first to be sold off. During tightening cycles, risk appetite typically declines systematically because the high-interest-rate environment itself inhibits risk-taking behavior. Rising real interest rates not only change the absolute valuation of assets but also alter investors' risk tolerance: when risk-free assets offer substantial returns, investors no longer need to take on excessive risks in pursuit of returns. This psychological shift is reflected in multiple dimensions: a slowdown in venture capital investment, a compression of growth stock valuations, and a widening of high-yield bond spreads. As one of the most risk-sensitive sectors, the crypto market naturally suffers the greatest impact.

Within this three-factor model framework, different categories of crypto assets exhibit differentiated pricing characteristics. Bitcoin, as a market benchmark, has 60% of its price fluctuations explained by macroeconomic liquidity factors, 25% by ETF flows, and the influence of on-chain fundamentals has decreased to below 15%. This structural change means that Bitcoin's correlation with traditional risky assets will remain high at 0.65-0.75, its annualized volatility will remain in the 55-70% range, and its sensitivity to real interest rates will be such that a 1% change in real interest rates will cause a 12-15% price reversal. Ethereum and other smart contract platform tokens exhibit a more complex pricing logic: network revenue accounts for 40%, developer activity for 25%, total locked value in DeFi for 20%, and macroeconomic factors for 15%. This combination means that Ethereum has some fundamental support but cannot completely escape the influence of macroeconomic factors. More importantly, there are complex interrelationships within smart contract platforms; the failure of one protocol can spread throughout the entire ecosystem through asset correlation and sentiment transmission, creating systemic risk. The divergence between application-layer tokens and governance tokens will be most pronounced: tokens with real cash flow (annual protocol fees exceeding $50 million) may gain valuation support, while pure governance tokens may face liquidity depletion. Data shows that among the top 200 tokens by market capitalization, less than 30% have annual protocol revenue exceeding $10 million, and only about 15% have sustainable dividend or buyback mechanisms. During a tightening cycle, funds will increasingly concentrate on a few high-quality assets, and most tokens may fall into a "zombie state."

Chapter 4: Investment Strategy Adjustment and Risk Management

Faced with the tightening environment triggered by the Warsh effect, all market participants need to fundamentally adjust their strategic frameworks and risk management methods. For traditional institutional investors, the first step is to redefine the role and positioning of crypto assets in their portfolios. Bitcoin should no longer be viewed as "digital gold" or an inflation hedge, but rather as a "high-beta growth asset," categorized under the same risk factor as tech stocks. This reclassification has practical implications: in asset allocation models, the risk budget for crypto assets needs to be adjusted accordingly, from 5-8% of total portfolio risk to 3-5%; in performance evaluation, the benchmark should be changed from gold or commodity indices to tech stock indices; and in risk management, stress test scenarios need to include extreme cases such as "liquidity shocks" and "sudden increases in correlation." Institutional investors also need to establish a more systematic decision-making process, dynamically adjusting based on macroeconomic signals (real interest rates, liquidity indicators, risk appetite), rather than relying on long-term holding convictions. Specifically, clear trigger conditions can be set: automatically reducing positions when real interest rates exceed a certain threshold, initiating hedging when liquidity indicators deteriorate to a specific level, and gradually increasing positions when risk appetite falls to historical lows. Hedging strategies become crucial, and the use of Bitcoin futures, options, or correlation trading should be considered to manage downside risk. Of particular note is that during a tightening cycle, the correlation between crypto assets and traditional assets may further increase, reducing their diversification value in a portfolio. This change needs to be accurately reflected in risk models and allocation ratios adjusted promptly.

Looking ahead, regardless of the final outcome of the Warsh nomination, the crypto market has entered an irreversible new phase. The core characteristic of this phase is the deep integration of crypto assets with the traditional financial system, leading to fundamental changes in pricing mechanisms, volatility patterns, and correlations. Regulatory frameworks will gradually become clearer, valuation methods will become more professional, market structures will become more complex, and cyclical characteristics will weaken. From a broader perspective, the Warsh effect may ultimately prompt the crypto industry to undergo necessary self-renewal. When the liquidity boom disappears, the market will be forced to return to its essence: creating real value, solving real problems, and building sustainable economic models. Projects that rely on speculation and narratives without substantial progress will be eliminated, while truly innovative protocols will gain room to grow.