What caused the massive Bitcoin crash? Clues point to a blow-up at Hong Kong hedge funds
Crypto prices have been completely shaken this week, with Bitcoin dropping nearly $15,000 in 24 hours; It’s a bloodbath not seen since the collapse of crypto fraudster Sam Bankman-Fried’s empire in 2022. Bitcoin on Friday, clawed back Most of these losses are currently trading around $70,000, but this event has even seen longtime crypto insiders asking each other, “What the hell just happened?” It caused them to ask. There are many theories floating around, but one is particularly intriguing: The crash was caused by Hong Kong traders who placed highly leveraged Bitcoin bets that went horribly wrong.
This theory was put forth Open X By Parker White, a former stock trader who is now the COO of a crypto firm called DeFi Development Corporation. In a lengthy speech, White said there was evidence pointing to a sudden explosion of Hong Kong hedge funds holding call options on BlackRock’s IBIT, the world’s largest Bitcoin ETF.
White suggests that hedge funds use Yen carry trading (a form of interest arbitrage) to fund large positions in out-of-the-money IBIT options. This meant that Bitcoin prices, which had been declining since 2017, were at risk. big sale It would recover in October. However, the expected rally did not come. Meanwhile, White estimates that Hong Kong funds have also been hit by headwinds in the Yen carry trade (which has made it more expensive for them to finance) and exposure to recent tremors in the silver market.
As a result, hedge funds faced a perfect storm, with the crypto market falling further this week while the value of their assets plummeted until they were liquidated; This caused a mass sell-off of IBIT shares and a catastrophic decline for Bitcoin. White explained what happened in trader language:
I could now easily see how the fund(s) were executing a leveraged options trade on IBIT (as OTM connotes = ultra-high gamma) with capital borrowed in JPY. October 10 could well have blown a hole in their balance sheet as they tried to regain it by adding leverage, waiting for the “obvious” recovery. As this leads to increasing losses in JPY along with rising funding costs, I could see how the fund(s) would become more desperate and jump into the Silver trade. Things got worse when this broke out and this latest move in BTC put an end to them.
In his post, White also pointed out that Hong Kong hedge funds, which trade Bitcoin only in the form of ETF shares, are not part of the traditional crypto ecosystem. This means that conversations about their plight on “Crypto Twitter,” the go-to forum for industry news, are not sparking and creating counterparties who have suffered huge losses and are likely to warn others.
