What this means for Bitcoin

BTC’s main signal was not a rate cut, but Warsh’s stated intention to shrink the Fed’s balance sheet and remove liquidity from the system.

On Tuesday, Kevin Warsh, Donald Trump’s pick to replace Federal Reserve Chairman Jerome Powell, testified before the Senate Banking Committee.

He promised to be independent of the White House but stopped short of promising to cut rates immediately, leaving market watchers trying to figure out what a Warsh-led Fed would mean for liquidity and risk assets like Bitcoin (BTC).

The Fed moves from rates to balance sheet

The hearing made headlines. Warsh told senators that the Fed had “lost its way” and needed fundamental reform.

He said under oath that Trump never asked him to commit to cutting rates in a specific meeting, a claim that directly contradicts Trump’s own statement to CNBC that same morning, where the president said he would be “disappointed” if Warsh didn’t cut rates immediately after taking office.

Senator Ruben Gallego didn’t let this slide:

“So someone here is lying; it’s either you or President Trump.”

When Senator John Kennedy asked if he would be someone’s “human puppet,” Warsh was blunt:

“Absolutely not. I will be an independent actor if confirmed as chairman of the Federal Reserve.”

On crypto, he was blunt: “Crypto is now part of the American financial system” and he ruled out the idea of ​​a central bank digital currency under his watch.

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But the signal that really matters for Bitcoin wasn’t about rates. An analysis published Tuesday by XWIN Research Japan says Warsh’s testimony points to something more structural: a reduction in the balance sheet. This is a quantitative tightening, which involves reducing the Fed’s bond holdings and removing liquidity from the system.

As XWIN says, this targets not just the “price” of money via rates, but the “quantity” of liquidity itself. The uncomfortable scenario they describe is one where short-term rates fall while long-term yields rise, a combination that has historically been difficult for risk assets.

Warsh directly fueled this interpretation. He told senators that the Fed’s balance sheet was too large, that it should shrink and that the central bank did not have to hold long-term Treasuries.

He also said he would end Fed officials’ practice of publicly communicating rate changes in advance, arguing that doing so locks policymakers into their forecasts long after the data has changed.

On-chain data points in the other direction

Bitcoin’s reaction during the hearing was swift. It fell below $75,000 before recovering and was trading around $78,000 at the time of writing, up about 2.7% over 24 hours and 5.4% over the week.

What XWIN Research finds interesting, however, is what’s happening on the channel beneath all the noise. The long-term holders’ SOPR, which tracks whether Bitcoin holders are selling for a profit or a loss, is around 1.0. This means they don’t cash out aggressively.

Historically, XWIN noted, this reflects reduced selling pressure and limited supply. Simply put, despite macroeconomic tightening, the available supply of Bitcoin is not increasing.

Their reading of the situation: macro-liquidity is weakening while the internal structure of Bitcoin is resisting. This divergence, they argue, indicates an accumulation phase rather than a clean break, with the possibility of a sharp rise if ETF demand returns once liquidity conditions change.