By Hannah Lang and Elizabeth Howcroft
NEW YORK, Feb 7 (Reuters) - Bitcoin could drop further after wiping out all of its price gains since the election of U.S. President Donald Trump as liquidity is expected to remain thin for the near future.
Bitcoin's slump alongside other digital asset prices coincides with investor concerns about inflated tech valuations and the uncertain path of U.S. Federal Reserve rate cuts.
"This contraction has been underway for several months and remains ongoing, suggesting
it is likely to persist for some time," said Thomas Probst, a research analyst at crypto data provider Kaiko.
"Reduced liquidity translates into sharper and more erratic price movements," he added.
Precious metals and cryptocurrencies sold off heavily January 30, after U.S. President Donald Trump named Kevin Warsh as the next Fed chair, due to expectations he could shrink the Fed's balance sheet, reducing demand for bitcoin. Digital asset prices have seesawed since, declining to close down 20% on Thursday before rebounding Friday.
The moves have raised questions about the outlook for bitcoin and other cryptocurrencies in the year ahead. The end of the year proved to be tumultuous: October also saw the largest crypto liquidation event in history after Trump announced new tariffs on Chinese imports, washing out liquidity that has yet to fully return.
"The flash crash back in the fall was this kind of pin that popped the leverage bubble," said Denny Galindo, an investment strategist at Morgan Stanley Wealth Management.
The Trump administration's friendly stance toward crypto helped give bitcoin a major boost last year, sending it to an all-time high above $125,000 in October. Still, Trump's introduction of pro-crypto policies in 2025 has not stemmed the latest price declines.
Bitcoin fell below $61,000 on Thursday, its lowest level since a month before Trump's election.
But some analysts have theorized that the worst may already be over.
“There are several things signifying that we are very close to a bottom, if not having achieved it," said James Butterfill, head of research at crypto asset manager CoinShares, who added some investors might choose to buy the dip. Selling by so-called "whales" -- individuals or entities holding 10,000 or more bitcoin -- has started to slow, he said.
“I think a lot of investors are seeing this as actually an opportunity, rather than running for the hills," he said.
THIN LIQUIDITY
Bitcoin's average 1% market depth - a measure of the crypto token's ability to absorb trades without significant price fluctuations - was more than $8 million in 2025, but fell to around $6 million after October 10, and now stands at around $5 million, Probst said.
That means that the amount of bitcoin available to trade at close to the current price has been shrinking, so even relatively small orders now cause bigger moves than they did prior to October's crash.
"It is the trend in liquidity that is truly concerning," said Probst.
Market participants are bracing for more volatility in the near term, said Andrew Moss, head of digital assets research at Jefferies.
"We see few bullish indicators that suggest we may be approaching the bottom," he said.
Cryptocurrencies represent a small part of global markets, but the points of crossover between the crypto world and mainstream finance - including stablecoin reserves, crypto-related stocks and bank exposure to crypto - have all grown in recent years.
Bitcoin has become more closely correlated to equities in periods of market stress, making it more sensitive to macroeconomic and geopolitical developments, said Probst.
Global equity indexes rose on Friday as investors crept back into U.S. technology stocks after a massive selloff in the prior three sessions. The earlier declines were triggered by fears around spending on artificial intelligence.
Bitcoin rose more than 10% above the key $70,000 level.
THE TRUMP EFFECT
Bitcoin soared after Trump was elected president in November 2024, as investors anticipated his administration would overhaul digital asset policy and fulfil certain campaign promises, including establishing a strategic bitcoin reserve.
Trump himself is involved in numerous crypto ventures, including an eponymous meme coin and a venture called World Liberty Financial that is led by his family.
The administration moved quickly to answer the crypto industry's biggest ask by imposing a new regime at the U.S. Securities and Exchange Commission and passing a law to regulate dollar-pegged crypto tokens. But it is not immediately certain what other crypto-friendly measures might come.
Bitcoin in particular was buoyed by Trump's campaign pledge to create a national bitcoin stockpile. Although Trump signed an executive order creating a bitcoin reserve from the cryptocurrency the U.S. government has seized as part of asset forfeitures, the government has not embarked on a bitcoin buying spree, said Galindo.
"It was created, but maybe it wasn't this kind of big moment... some of those people before the inauguration were kind of hoping for," he said.
(Reporting by Hannah Lang and Elizabeth Howcroft, edIting by Lananh Nguyen and Anna Driver)
