In-depth Analysis: Why Did Bitcoin Plummet? Market Liquidity Drying Up and Key Support Levels Breached

Bitcoin prices experienced a sharp volatility in early February. As of February 2nd, Bitcoin is temporarily priced at around $76,850, a significant decline from recent highs.

This drop was not triggered by a single event but resulted from multiple factors acting together in an environment of extremely scarce market liquidity.

01 Market Status: Price Breach and Institutional Pressure

The current Bitcoin market is undergoing a severe stress test on institutional holdings. As of February 2nd, Bitcoin is temporarily priced at about $76,850, roughly 40% below its peak in 2025.

This level has already threatened the cost basis for major institutional holders like MicroStrategy, and market concerns about liquidity for highly leveraged positions are rapidly intensifying.

Institutional holdings are under serious scrutiny. MicroStrategy and 11 spot Bitcoin ETFs hold a combined total of about 10% of the circulating Bitcoin supply, with an average purchase cost of as high as $85,360.

At the current price, these institutional positions are collectively unrealized losses of approximately $8,000 per Bitcoin, with total unrealized losses reaching about $7 billion.

Funds flowing into spot Bitcoin ETFs also reflect market pressure. These ETFs have experienced net outflows for 10 consecutive trading days, as investors are redeeming during retracements after buying at high levels. This capital structure is amplifying downward volatility.

Market liquidation data is equally alarming. According to Coinglass data, on February 1st alone, total crypto contract liquidations exceeded $2.5 billion, with 420,000 traders liquidated, of which over 90% were long positions.

02 Core Cause: Liquidity Vacuum Amplifies Market Volatility

The fundamental reason for Bitcoin’s recent sharp decline is the continued depletion of market liquidity. Tiger Research points out that Bitcoin trading volume has significantly shrunk, and even small market shocks can trigger excessive price swings in a low-liquidity environment.

This liquidity contraction can be observed from multiple dimensions: recent daily trading volume is well below the 2025 peak, bid-ask spreads have widened, and open interest and funding rates in derivatives markets are relatively low.

Global macro analyst Raoul Pal offers a broader perspective. He believes that the root cause of this decline is not a structural problem with cryptocurrencies themselves but a severe shortage of dollar liquidity, triggering a chain reaction.

Pal notes that when the U.S. Treasury rebuilds its cash account (TGA), the negative impact on liquidity is no longer cushioned by repurchase agreement facilities (RRP), making TGA rebuilding a pure liquidity drain.

This liquidity crunch has been worsened by two U.S. government shutdowns and “other issues with the US financial pipeline.” In such an environment of scarce liquidity, traditional safe-haven assets like gold have drawn away marginal liquidity that might otherwise flow into Bitcoin and tech stocks.

03 Key Events: Two Major Triggers Accelerating the Decline

Market liquidity was already thin, and two key events became the final straw crushing the market.

Microsoft’s earnings miss triggered the first wave of decline. On January 29th, Microsoft’s Q4 earnings showed slowing growth in its cloud service Azure, down 1% from the previous quarter, reigniting concerns over an overheated AI investment bubble.

As panic spread, investors began reducing risk assets, with Bitcoin, as a highly volatile asset, being the first to be sold off.

Fears over Federal Reserve policy due to the nomination of a new chair then triggered the second wave of decline. On the evening of January 29th, news emerged that Trump was preparing to nominate Kevin Walsch as the next Fed Chair.

Walsch is widely viewed as a hawk. During his tenure as a Fed governor from 2006 to 2011, he opposed quantitative easing and warned of inflation risks. This nomination immediately sparked concerns about tightening liquidity.

Historically, cryptocurrencies perform well in periods of ample liquidity, but Walsch’s potential leadership of the Fed has intensified fears of liquidity tightening. In a market already tight on liquidity, investors quickly began to sell off.

04 Technical Analysis: Key Support Breach and Psychological Shift

From a technical perspective, Bitcoin broke through a key structural support—Active Realized Price during this decline. This level was around $87,000.

Active Realized Price is an on-chain indicator that excludes long-unused positions and calculates the average cost based on actively circulating tokens. In other words, it marks the break-even point for current traders.

Once the price falls below this level, most active participants are simultaneously in a loss position. During the drop from $87,000 to $81,000, psychological pressure further intensified, as many traders who entered at high levels were forced to endure floating losses, increasing the likelihood of further selling.

From a market psychology standpoint, a breach of the Active Realized Price has self-reinforcing effects. When the price drops below this level, short-term holders generally incur losses, reducing risk tolerance, and increasing panic selling during further declines.

This mechanism turns $87,000 from a support level into resistance, and a return above this level would face significant “short covering” pressure.

05 Market Structure: Bitcoin-Dominated High Correlation

The 2026 crypto market revealed an unsettling fact: despite thousands of alternative tokens and institutional adoption, the market still largely moves in sync with Bitcoin, offering little true diversification.

This correlation was especially evident during the decline. Bitcoin’s price has fallen 14% to around $75,000, the lowest since April last year, with nearly all major and minor tokens declining by similar or even larger margins.

Of the 16 indices tracked by CoinDesk, almost all have fallen 15% to 19% this year. Indices related to DeFi, smart contracts, and computational tokens have declined 20% to 25%.

More concerningly, tokens associated with blockchain protocols generating real revenue are also falling alongside Bitcoin. For example, Aave, a leading Ethereum lending protocol, has dropped 26%.

Markus Thielen, founder of 10x Research, points out that the rise of stablecoins has fundamentally changed the allocation of the crypto market. Stablecoins enable investors to quickly shift from bullish to neutral exposure, effectively serving as a defensive allocation within the crypto space.

06 Future Outlook: Liquidity Recovery and Market Rebuilding

The current market is avoiding Bitcoin. Trading volume continues to shrink, selling pressure persists, and rebounds are becoming increasingly difficult. In the short term, uncertainty remains. Bitcoin is likely to continue following stock market movements.

The $80,000 level has already been breached, and further declines cannot be ruled out. However, once the stock market stabilizes, Bitcoin may again become a favored alternative investment.

Historical experience shows that whenever tech stocks stagnate due to bubble fears, capital tends to rotate into alternative assets. Improved Bitcoin liquidity may result from this capital rotation.

Meanwhile, crypto-friendly policies by the SEC and CFTC are gradually being implemented. Allowing crypto investments within 401(k) retirement accounts could open the floodgates for potentially up to $1 trillion in capital inflows. This structural liquidity improvement will fundamentally change Bitcoin’s market depth and stability.

Looking further ahead, global liquidity continues to expand, and institutional policies toward cryptocurrencies remain firm. Strategic institutional accumulation is still progressing in an orderly manner, and the Bitcoin network itself has not experienced operational issues.

The current pullback is merely a short-term overreaction caused by liquidity scarcity and does not undermine the long-term bullish trend.

Recent Bitcoin Price Performance and Key Event Timeline

Future Outlook

As market liquidity gradually recovers and the Active Realized Price shifts from resistance back to support, the market will reassess Bitcoin’s value.

Until then, investors must adapt to this environment of high volatility and low liquidity or wait for clearer signals.

As Raoul Pal states: “The current pain may just be the pangs of liquidity transition, not the end of the crypto cycle.” For long-term investors, understanding the nature of market volatility is more important than short-term price predictions.