Cryptocurrency prices experienced a significant downturn this week, with Bitcoin plummeting by nearly $15,000 in a single 24-hour period. This sharp decline mirrors the market collapse seen in 2022 following the downfall of Sam Bankman-Fried’s crypto ventures. While Bitcoin has since recovered most of these losses and is currently trading around $70,000, the event has left many in the crypto community questioning the cause. A prominent theory suggests that the crash was triggered by Hong Kong-based traders whose highly leveraged Bitcoin positions soured.
This theory was notably put forth by Parker White, a former equities trader and current COO at DeFi Development Corporation. In an extensive online thread, White presented evidence indicating the sudden collapse of Hong Kong hedge funds that held call options in BlackRock’s IBIT, the world’s largest Bitcoin ETF.
White posits that these hedge funds financed substantial positions in out-of-the-money IBIT options using the Yen carry trade, a strategy involving interest rate arbitrage. This represented a high-risk bet on Bitcoin’s price recovery, which had been declining since October. However, the anticipated rally did not materialize. White further speculates that the Hong Kong funds were also negatively impacted by adverse conditions in the Yen-carry trade, increasing their financing costs, and by recent volatility in the silver market.
The confluence of these factors created a perfect storm for the hedge funds. As the crypto market continued its downward trend this week, the value of their holdings diminished, leading to forced liquidations. This, in turn, triggered a mass sell-off of IBIT shares and contributed to Bitcoin’s dramatic price drop.
White elaborated on the situation using industry jargon: “Now, I could easily see how the fund(s) could have been running a levered options trade on IBIT (think way OTM calls = ultra high gamma) with borrowed capital in JPY. Oct 10th could very well have blown a hole in their balance sheet, that they tried to win back by adding leverage waiting for the “obvious” rebound. As that led to increased losses, coupled with increased funding costs in JPY, I could see how the fund(s) would have gotten more desperate and hopped on the Silver trade. When that blew up, things got dire and this last push in BTC finished them off.”
White also highlighted that these Hong Kong hedge funds, whose Bitcoin trading was exclusively through ETF shares, are not integrated into the traditional cryptocurrency ecosystem. Consequently, news of their difficulties did not circulate on “Crypto Twitter,” a primary platform for industry news, nor did it create counterparties who suffered significant losses and would have been inclined to issue warnings.
It is important to note that White’s explanation remains a theory. Historical patterns indicate that major Bitcoin crashes are typically the result of multiple contributing factors rather than a single event. Indeed, this week’s crypto market turmoil coincided with a broader sell-off in AI-related assets, uncertainty surrounding a significant blockchain bill, and the appearance of crypto figures in the Epstein files – all of which likely played a role in the recent downturn.
Despite these caveats, White’s theory is considered the most compelling and is further substantiated by circumstantial evidence, such as the Securities and Exchange Commission’s recent decision to remove limits on Bitcoin options trading.
Other established figures in the crypto space have expressed cautious agreement with the Hong Kong hedge fund theory. Respected venture capitalist Haseeb Qureshi deemed the theory plausible but noted that it might take months for regulatory filings to provide confirmation. He also pointed out that sometimes a significant crypto player can collapse without their identity ever being revealed. Nevertheless, for those convinced that a hedge fund is at the heart of this week’s market instability, a bet has already been placed on the potential culprit.