Crypto markets faced a significant upheaval this week, with Bitcoin experiencing a dramatic decline of nearly $15,000 within just 24 hours. This steep drop has drawn comparisons to the turbulence that followed the notorious collapse of Sam Bankman-Fried’s cryptocurrency empire back in 2022. By Friday, Bitcoin managed to recover considerably, hovering around $70,000, but the volatility has left many seasoned crypto insiders puzzled, exchanging sentiments about what exactly led to this turmoil.
Various theories are emerging regarding the causes of the crash, with one particularly notable explanation spotlighting Hong Kong traders who engaged in high-leverage Bitcoin positions that backfired spectacularly. Parker White, a former equities trader now serving as COO at DeFi Development Corporation, articulated this theory on social media platform X. In a detailed thread, he pointed to the abrupt downfall of hedge funds in Hong Kong that held call options in BlackRock’s IBIT — the largest Bitcoin ETF in existence.
According to White, these hedge funds resorted to the Yen carry trade, which is a practice of borrowing in a currency with low interest rates to invest in a currency with higher returns. They used this strategy to finance substantial positions in out-of-the-money IBIT options, betting on a rebound in Bitcoin prices that had been faltering since a significant sell-off in October. Unfortunately for these traders, the anticipated rally did not materialize.
Moreover, White speculates that these funds encountered additional challenges stemming from unfavorable conditions in the Yen-carry trade, which increased their borrowing costs, along with exposure to instability in the silver market. This disastrous combination led to a decline in the value of their holdings, ultimately resulting in liquidations that triggered a massive sell-off of IBIT shares, further exacerbating Bitcoin’s plunge.
In his analysis, White elaborated using trader terminology, indicating that the hedge funds could have been managing a highly leveraged options strategy on IBIT. With the alarming events from October potentially detrimental to their financial standing, they may have attempted to recover their losses by increasing leverage, banking on an anticipated price rebound. However, as losses mounted alongside rising funding costs, a subsequent venture into the silver market may have sealed their fate, culminating in the catastrophic drop in Bitcoin value.
Interestingly, White noted that these Hong Kong hedge funds were only engaging in Bitcoin trading through ETF shares, meaning they are somewhat detached from the traditional cryptocurrency ecosystem. This detachment likely resulted in limited discourse on social media channels like “Crypto Twitter,” where such developments typically generate significant buzz. Consequently, there were few warnings from within the community about the precarious situation.
However, it’s important to note that White’s theory remains speculative, reflecting only one possible explanation. Historical patterns of major Bitcoin crashes often indicate that they are influenced by a confluence of events rather than a singular cause. This week’s upheaval corresponds with broader market trends, including a sell-off in AI-related assets, ongoing uncertainties about critical blockchain legislation, and mentions of crypto entities in recent Epstein documents.
Despite these complexities, the Hong Kong hedge fund narrative appears to be the most compelling explanation at the moment, bolstered by circumstantial evidence, including a recent ruling by the Securities and Exchange Commission to lift restrictions on Bitcoin options trading. Other prominent figures in the crypto sphere have cautiously supported this theory, acknowledging its plausibility but also recognizing that it may take significant time for regulatory disclosures to validate these claims.
For those convinced that a hedge fund’s predicament is at the heart of this week’s market chaos, forums like Polymarket already exist for individuals to wager on the identities of potential culprits, showcasing the unique intersection of finance, speculation, and community intuition in the cryptocurrency domain.
