Two weeks ago, we published a piece examining what would happen if Trump succeeded in capturing the Federal Reserve.
The thesis was straightforward: a politicized Fed would mean lower rates, higher inflation, and a sustained bid for hard assets. Gold at record highs seemed to confirm the debasement trade. Bitcoin's lag was curious but explainable.
On January 30, 2026, Trump is expected to nominate Kevin Warsh as the next Fed Chair.
Bitcoin trades at $82,825 this morning, continuing yesterday's plunge to $83,383 and now down sharply from the $95,000 level when we first wrote. Gold sits at $5,229 after briefly touching $5,600 yesterday. The dollar index stands at 96.50, near four-year lows.
The pressure campaign against Powell has escalated beyond rhetoric. On January 10, the Department of Justice served the Federal Reserve with grand jury subpoenas, ostensibly investigating a $2.5 billion headquarters renovation project.
Powell characterized the action publicly as retaliation for refusing to align Fed policy with the President's preferences. Whether or not the investigation produces charges, the signal is clear: this administration views the central bank as subordinate to executive priorities.
The Warsh appointment changes everything.
Not because it invalidates the original analysis, but because it reveals we were asking the wrong question. The debate isn't just about Fed independence versus political capture. It's about which form of tightening markets fear more: traditional rate hikes, or the systematic withdrawal of liquidity that created the asset price boom in the first place.
Why the Administration Needs Lower Rates
The political pressure on the Fed isn't ideological. It's mathematical.
Table 1: The Federal Debt Burden
The federal government now spends more on interest than on defense. Every month that rates stay elevated costs real money.
The sensitivity is pretty stark: each 100 basis points cut across the yield curve saves the Treasury approximately $380 billion annually. A Fed Chair who delivers 200 basis points of cuts over two years would reduce the government's interest bill by three-quarters of a trillion dollars per year.
Table 2: Rate Cut Scenarios and Fiscal Impact
This is the context in which Trump views Fed policy.
Powell's insistence on data-dependent gradualism isn't principled central banking to the administration. It's a line item bleeding the federal budget. The political incentive to find a more accommodating Fed Chair overwhelms any abstract commitment to central bank independence.
The question for markets is whether Warsh actually delivers the rate relief the administration expects, or whether his balance sheet obsession produces tighter financial conditions through a different channel.
The Man Who Quit Over QE2
Kevin Warsh's position on monetary policy has been remarkably consistent since he resigned from the Fed Board in March 2011.
He left specifically to protest Ben Bernanke's decision to pursue a second round of quantitative easing, $600 billion in Treasury purchases designed to lower long-term rates and spur lending.
Years later, in a joint appearance with Bernanke, Warsh explained his objection: "My overriding concern about continued QE, then and now, involves the misallocations of capital in the economy and the misallocation of responsibility in our government. Misallocations seldom operate under their own name. They choose other names to hide behind. They tend to linger for years in plain sight. Until they emerge with force at the most inauspicious of times and do unexpected harm to the economy."
The Fed's balance sheet currently stands at $6.5 trillion according to Congressional Research Service data from late 2025, down from its $8.9 trillion peak in 2022 but still roughly eight times its pre-2008 size of around $900 billion.
Warsh has argued consistently that this bloated balance sheet artificially suppresses long-term yields, subsidizes Wall Street at Main Street's expense, and keeps inflation expectations elevated. His proposed solution: aggressive quantitative tightening combined with lower short-term rates.
This is not the easy-money Fed that crypto bulls were expecting. Whether these convictions survive contact with the structural constraints of the modern Fed remains to be seen.
The Lauder Connection
There's also a personal dimension to the nomination that complicates the policy picture.
Warsh is married to Jane Lauder, daughter of Ronald Lauder, the Estée Lauder billionaire heir who has been one of Trump's closest friends since they met at Wharton in the 1960s. Lauder has donated millions to Trump's campaigns, publicly defended Trump's mental fitness, and is credited with planting the Greenland acquisition idea. He has since acquired business interests in Greenland and recently won a Ukrainian lithium contract.
So here it becomes our opinion that Warsh likely isn't just a policy pick. He's family-adjacent to Trump's inner circle through marriage. Whether that connection makes him more likely to hold his hawkish line or more likely to accommodate the President's preferences is an open question. But it suggests Trump believes he can work with Warsh in ways he couldn't with Powell.
The man who resigned over QE2 might find it harder to resign when his father-in-law's oldest friend is in the Oval Office.
The Candidate Crypto Actually Wanted
Kevin Hassett would have been the bullish scenario. Until Trump decided to keep him running the National Economic Council in mid-January, Hassett was the other leading candidate for Fed Chair.
Markets briefly priced him as the frontrunner. Bitcoin held above $100,000. Then Trump made the call, Hassett stayed at the NEC, and Warsh's odds jumped to 92% on Polymarket.
Table 3: Warsh vs. Hassett, Policy Comparison
Both candidates would cut rates. But Hassett would have done so while maintaining the accommodative liquidity conditions that have supported risk assets since late 2023. Warsh wants to cut rates while simultaneously draining that liquidity. For Bitcoin, these are not equivalent policies.
One keeps the punch bowl on the table while lowering the price of admission. The other takes the punch bowl away entirely.
Why Bitcoin Lives and Dies With the Balance Sheet
The relationship between the Fed's balance sheet and Bitcoin's price is not subtle. Research from multiple sources shows Bitcoin has exhibited correlations with global M2 money supply ranging from 60% to 95% depending on the timeframe measured.
These correlations typically operate with a 60-to-90 day lag, meaning Bitcoin tends to respond to liquidity changes roughly three months after they occur.
Table 4: Fed Balance Sheet Cycles and Bitcoin Performance
When the Fed expands its balance sheet, it injects reserves into the banking system. Banks seek higher-yielding opportunities. Borrowing becomes cheap. Leverage becomes attractive. Capital floods into risk assets, including crypto. The process reverses when the Fed drains liquidity.
Research from the Richmond Fed found that quantitative tightening's liquidity effects may be roughly double those experienced during quantitative easing. This asymmetry matters. It potentially takes more QE to boost asset prices than it takes QT to crash them.
The Fed officially ended its most recent QT program on December 1, 2025. The balance sheet had shrunk by $2.3 trillion over three and a half years. Bitcoin's price trajectory since then has been sideways to down, diverging from past patterns where Bitcoin often bottomed before the Fed stopped draining.
Enter Warsh, who has advocated for resuming QT.
The Paradox: Lower Rates, Tighter Markets
Warsh's pitch sounds elegant: cut short-term rates to help households and small businesses with mortgages and loans, but shrink the balance sheet to drain the excess liquidity that's been inflating asset prices and keeping long-term yields artificially low. Lower rates for Main Street, tighter conditions for Wall Street.
He articulated this view in a July 2025 CNBC interview: "I think the Fed has the balance wrong. A rate cut is the beginning of the process to get the balance right... We can lower interest rates a lot, and in so doing get 30-year fixed-rate mortgages so they're affordable so we can get the housing market to get going again. And the way to do that is to free up the balance sheet, take money out of Wall Street. Wall Street right now is booming. They don't need any extra help. But that excess money can go to Main Street."
The problem is that the Fed's balance sheet doesn't sit idle on Wall Street's books. Those reserves enable the credit creation and leverage that supports asset prices across the board. Drain the reserves, and the entire risk curve reprices.
Long-term rates might initially fall as Warsh predicts, but if inflation stays elevated or if Treasury issuance continues at $2 trillion-plus deficits annually, the market could demand higher term premiums to hold duration risk. This is also where the system might constrain Warsh. If long rates spike and repo markets show stress, he may be forced to pause or reverse QT regardless of his stated intentions.
What Warsh Actually Thinks About Bitcoin
Warsh's views on cryptocurrency add another complication. Unlike some other candidates for Fed Chair, Warsh is not a crypto agnostic. He has formed strong opinions, and they lean skeptical.
In a November 2022 Wall Street Journal op-ed, Warsh wrote: "Cryptocurrency is not mysterious, it is not money, but software. Most cryptocurrency is masquerading as money in some form of circulation... The emergence of stablecoins makes this revolutionary new software more like money. But most stablecoins will be worthless."
His preferred alternative? A U.S. central bank digital currency to compete with China's digital yuan. He has argued the Federal Reserve should establish a wholesale digital currency to enhance American economic standing while ensuring "volatility does not jeopardize the dollar's dominance."
Warsh has made small investments in crypto infrastructure (Bitwise, the failed Basis stablecoin project) while remaining skeptical of Bitcoin itself. In a March 2018 op-ed, he wrote: "Bitcoin's price volatility significantly diminishes its usefulness as a reliable unit of account or an effective means of payment. Bitcoin might, however, serve as a sustainable store of value, like gold."
That hedge came before Warsh developed his current views on balance sheet policy. If Warsh believes the Fed's bloated balance sheet has artificially inflated asset prices across risk markets, Bitcoin (which correlates more strongly with liquidity than virtually any other major asset) would rank among the primary beneficiaries of that artificial inflation. Unwinding it would presumably be the goal.
The Gold Rally BTC Didn't Follow
Gold surged 65% in 2025, its best year since 1979. It hit a then-record of $4,643 on January 14, then exploded past $5,600 yesterday before pulling back to $5,229 this morning.
Gold rallied throughout the period when Warsh's nomination became increasingly likely. It peaked right as Bloomberg reported Trump was preparing the formal announcement. Bitcoin moved in the opposite direction, falling from around $95,000 in early January to yesterday's low of $83,383.
Table 5: Gold vs. Bitcoin, January 2026 Divergence
If Bitcoin were actually functioning as digital gold, it should have tracked gold's rally. Instead, it behaved like a leveraged tech stock. When news of Warsh's imminent nomination hit, Bitcoin fell hard while gold only dipped modestly before recovering.
Bitcoin is not gold, at least not yet. It's a liquidity-driven risk asset that happens to have some monetary characteristics. Those characteristics might eventually dominate its price action, but they haven't yet. For now, the balance sheet matters more than the narrative.
Why Institutions Made It Worse
The ETF era was supposed to stabilize Bitcoin. Spot ETFs launched in January 2024 with the promise of bringing long-term institutional capital into crypto. What actually showed up was macro-sensitive capital that trades Bitcoin like a leveraged Nasdaq position and exits at the first sign of liquidity tightening.
Table 6: Bitcoin ETF Flow Patterns
The problem is asymmetry. Inflows during good times have been steady but measured. Outflows during stress have been rapid and concentrated. ETF investors aren't HODLers. They're allocators running quantitative models that flag Bitcoin as a risk-off sale when liquidity conditions tighten.
Jim Ferraioli, Schwab's director of crypto research, noted in late January: "I see little reason to expect a sustained move beyond current levels without a pickup in metrics such as on-chain activity, ETF flows, or derivatives positioning. Until [the Clarity Act] is passed, I expect narrow trading between the low $80,000s and mid-$90,000s, as major institutional players will remain on the sidelines."
This assessment was made before the Warsh nomination became imminent. If aggressive QT returns to the table, those ranges likely move lower. The $80,000 floor that held most of January broke yesterday. Analysts at Swissblock warned that "a decisive breakdown below the $84,500 support level could open the door to a deeper correction toward $74,000."
$74,000 would represent a 41% decline from the October 2025 peak. More importantly, it would challenge the narrative that institutional adoption creates a permanent floor under prices. That narrative depends on sustained inflows. Sustained inflows depend on accommodative financial conditions.
Table 7: Current Market Snapshot (January 30, 2026)
How This Resolves
The original question was: what happens to crypto if Trump gets his Fed? The implicit assumption was that Trump would install a dove who cuts rates and keeps monetary policy loose. That person would be politically captured but crypto-friendly by default, because easy money benefits Bitcoin.
Warsh presents a different kind of capture. He'll likely cut rates, which Trump wants. But he's also likely to pursue balance sheet reduction, which Trump may not fully understand but which his advisors probably see as fiscal discipline.
The political narrative becomes: we're helping regular Americans with lower borrowing costs while reining in Wall Street excess.
This isn't the debasement trade many anticipated. It's closer to an anti-debasement trade. Warsh views the wealth effect, the deliberate policy of inflating asset prices to create a positive feedback loop into consumption, as a distortion that needs unwinding.
The case for Bitcoin as a hedge against monetary debasement assumes the debasement continues. If the Fed instead attempts to unwind prior debasement, the entire thesis potentially inverts. Bitcoin could become a leveraged short on that normalization process.
What the System Permits
The analysis above treats Warsh as a relatively free agent who can execute his ideological preferences. But Fed chairs don't operate in a vacuum. The financial system has structural constraints that may matter more than any individual's convictions.
Consider what aggressive QT actually requires.
Treasury absorption capacity. With $2+ trillion annual deficits, the Treasury needs buyers for its debt. If the Fed is actively selling, or refusing to roll over, its holdings, someone else must absorb that duration. Foreign central banks have been net sellers of Treasuries for years. Domestic banks face regulatory constraints on duration holdings.
The marginal buyer may not exist at current yields, which means yields would need to rise substantially to clear the market. Warsh might want to shrink the balance sheet, but the bond market gets a vote.
Repo market plumbing. September 2019 demonstrated what happens when reserves drain too far too fast. Overnight funding rates spiked 300 basis points in hours. The Fed was forced to inject emergency liquidity, effectively ending that QT cycle prematurely.
There's a floor below which reserves cannot fall without breaking the financial system's plumbing. Nobody knows exactly where that floor is until it breaks. Warsh can't drain faster than the system can handle.
Political feedback loops. Any Fed Chair who crashes asset prices 40%+ faces immediate backlash, not just from markets but from the political system. This administration has already demonstrated willingness to deploy legal pressure against Powell for far less than crashing retirement accounts.
Wealth effect dependency. The economy has become structurally dependent on asset prices supporting consumption. Household net worth drives spending decisions. Home equity funds renovations. 401(k) balances fund retirements.
A sharp, sustained asset price correction could tip the economy into recession, which would force the Fed to reverse course regardless of the Chair's preferences. The policy would fail on its own terms.
In our opinion, the question isn't really "what does Warsh believe?" It's "what does the system permit?"
The Case for Continuity
Critics of ideological Fed analysis point to a consistent historical pattern: chairs converge on similar behavior regardless of prior convictions.
Greenspan arrived as an Ayn Rand disciple skeptical of government intervention. He left as the architect of the "Greenspan put," the implicit promise that the Fed would rescue markets from any serious decline.
Powell was a balance sheet hawk before his appointment; in 2012, he publicly worried about the exit costs from QE. By 2020, he was running $120 billion in monthly purchases without apparent hesitation. Bernanke's academic work was more nuanced than critics suggest (he'd studied Japan's deflation extensively), but the scale of his eventual interventions surprised even him.
The pattern suggests institutional forces, including financial stability mandates, Treasury coordination, staff expertise, and market expectations, may be more determinative than any individual's ideology.
The Fed has become a load-bearing institution for asset prices. Removing that support risks collapse. Every Chair eventually confronts this reality.
This is why the compromise scenario may be most likely. Not because Warsh lacks conviction, but because the system has momentum that constrains any individual actor. He may arrive with hawkish intentions and find himself, eighteen months later, defending policies he once condemned.
The counterargument: maybe this time is different. The inflation of 2021-2023 may have genuinely shifted the institutional consensus toward balance sheet discipline. Warsh may have political cover from the administration to pursue tightening that previous chairs lacked.
The very pattern of convergence may have created the conditions for its own reversal.
We don't know for sure. Anyone claiming certainty about how Warsh will govern is overconfident. What we can do is map the scenarios and identify what to watch.
Three Ways This Plays Out
These scenarios we have come up with are frameworks for thinking about how different forces, including Warsh's ideology, structural constraints, political pressure, and market conditions, might combine.
A caveat is that each of them have their own internal logic. Each also depends on conditions we can't fully anticipate. But ultimately the value in this isn't in knowing which will occur, but rather - it’s in knowing what to watch for.
Table 8: Scenario Comparison
Scenario 1: The Nomination Fails
Requires Senate Republicans breaking with Trump on a major appointment. Historically rare. The most likely trigger would be market stress severe enough during confirmation that voting for a perceived hawk becomes politically toxic.
If it happens, Trump pivots to Christopher Waller or Michelle Bowman, both more conventionally dovish. Bitcoin rallies on relief. Balance sheet remains stable.
Scenario 2: Warsh Compromises With Reality
The historical base case. Warsh gets confirmed, cuts rates as promised, but quickly realizes aggressive QT is politically and economically untenable. Balance sheet gets "evaluated carefully." QT pushed to 2027 or later.
Markets initially sell off on confirmation, then gradually recover as actual policy proves more accommodative than feared.
Scenario 3: Warsh Delivers the Full Program
Requires Warsh maintaining ideological commitment despite pressure, and the system absorbing QT without breaking.
This is how his policy mix could backfire. He cuts short rates as promised, but long rates rise anyway as the term premium blows out. The yield curve steepens violently. Banks face mark-to-market losses. Risk appetite evaporates. Bitcoin tests 2023 lows.
The Legal Wildcard
There's a fourth variable that could render the Warsh analysis moot.
Trump v. Cook, currently before the courts, tests whether the President has authority to dismiss a Fed Governor before their term expires.
Lisa Cook's seat is the test case. If the administration wins, the precedent would allow any President to remove Fed officials at will. The central bank would become, legally speaking, an executive agency no different from the Treasury or Commerce Department.
Under that ruling, Warsh's balance sheet hawkishness would last exactly as long as Trump tolerates it. The moment asset prices fall far enough to threaten political standing, Warsh either pivots or gets replaced.
This scenario is harder to trade. It represents a regime shift where Fed policy becomes impossible to forecast beyond the current news cycle.
Bitcoin might benefit from the chaos and loss of dollar credibility. Or it might get caught in the crossfire of a currency crisis. Nobody knows how markets would price the effective end of Fed independence.
The case could be decided by late spring.
What Breaks our Thesis
The scenarios above assume markets continue to treat the Fed as a credible institution even under new leadership.
That assumption has a measurable price.
The 5-year, 5-year forward inflation expectation currently sits at 2.24%. This is the bond market's implied forecast for average inflation from 2031 to 2036. It represents the market's judgment on whether the Fed will maintain price stability over the long run, regardless of who chairs the institution.
Table 9: Fed Credibility Indicators
If the 5-year, 5-year forward breaks above 2.5% and stays there, the game changes. The market would be saying it no longer believes any Fed Chair can or will control inflation. Long-term yields would rise regardless of what Warsh does. And Bitcoin's behavior would become genuinely unpredictable, because the correlation with liquidity might break down in an environment of unanchored inflation expectations.
Watch this number.
The Bottom Line
If the Fed resumes draining its balance sheet aggressively, Bitcoin will struggle. The ETF flows have already shown that institutional capital exits fast when liquidity tightens.
But the structural constraints on aggressive QT are real, and the historical pattern of ideological chairs moderating is consistent. We don't know which version of Warsh will govern.
What we know: liquidity drives Bitcoin prices. Gold is outperforming. Institutional flows reverse quickly when conditions tighten. The framework here is diagnostic, not predictive. Watch the balance sheet, the term premium, the repo markets. The data will tell us which scenario is materializing.
The debasement trade isn't dead. But it's no longer a trade that automatically benefits Bitcoin. If Warsh gets his way, we'll discover whether Bitcoin can hold value during deliberate liquidity withdrawal. The 2022 crash suggested it cannot. The question is whether anything has structurally changed.
The answer will determine if Bitcoin is digital gold or just digital risk.
