Crypto markets faced a dramatic upheaval this week as Bitcoin plummeted nearly $15,000 within a 24-hour span, reminiscent of the chaotic fallout from the collapse of Sam Bankman-Fried’s crypto empire in 2022. By Friday, Bitcoin managed to recover much of its value, trading around $70,000, but the sudden decline has left even seasoned industry veterans perplexed, prompting a series of discussions about the underlying causes.
One theory gaining traction points to the role of Hong Kong traders who engaged in high-leverage Bitcoin bets that ultimately turned disastrous. This hypothesis was notably highlighted by Parker White, a former equities trader and current COO of DeFi Development Corporation, in a detailed post on X. White indicated that the crash might be linked to the unraveling of Hong Kong hedge funds that held call options in BlackRock’s IBIT, the world’s largest Bitcoin ETF.
According to White, these hedge funds leveraged a Yen carry trade—an interest arbitrage strategy—to finance significant positions in out-of-the-money IBIT options. This strategy relied on the assumption that Bitcoin prices, which had been declining since an October sell-off, would rebound. However, the anticipated resurgence failed to materialize, creating a precarious situation for the funds.
Additionally, White speculated that these hedge funds faced pressure from adverse movements in the Yen-carry trade and exposure to recent destabilizations in the silver market. As Bitcoin continued its downward trajectory this week, the value of their holdings eroded until the funds found themselves liquidated. This liquidation precipitated a mass sell-off of IBIT shares and resulted in a sharp decline in Bitcoin prices.
In more technical terms, White elaborated on the nature of the hedge funds’ trades, suggesting that they might have been executing a leveraged options strategy on IBIT that hinged on high gamma positions. As losses escalated and financing costs rose, the funds may have attempted to recover losses by increasing leverage, further compounding their predicament. The eventual fallout in the silver market added to their woes, culminating in a crisis that drove Bitcoin’s further decline.
Notably, White underscored that these Hong Kong hedge funds, which traded Bitcoin exclusively through ETF shares, operate outside the traditional crypto ecosystem. This divergence meant that discussions regarding their difficulties did not penetrate the usually vocal “Crypto Twitter,” where industry news often circulates, potentially preventing early warnings about the unfolding crisis.
It’s important to note that White’s theory remains speculative, as history shows that Bitcoin’s significant drops typically result from a confluence of factors rather than a single catalyst. The timing of this week’s downturn coincided with broader sell-offs of AI-related assets, uncertainty surrounding a critical blockchain legislative proposal, and recent controversies linking crypto entities to the Epstein files, all of which likely contributed to the market’s tumult.
Despite the multiplicity of potential influences, White’s explanation resonates strongly with many in the industry, bolstered by circumstantial evidence, including the recent decision by the Securities and Exchange Commission to lift restrictions on trading Bitcoin options.
Veteran figures in the crypto space, including respected venture capitalist Haseeb Qureshi, expressed cautious endorsement of the Hong Kong hedge fund hypothesis, though he acknowledged that it might take time for regulatory filings to provide clarity. He highlighted that significant players in the crypto world can sometimes fall out of the spotlight without their names ever being revealed.
For those convinced that a hedge fund is the source of this week’s upheaval, a forum on Polymarket has already emerged for trading predictions on the identity of the alleged miscreants, illustrating the ongoing intrigue and speculation surrounding the volatile crypto landscape.
