The Black Swan Revealed: The Real Reason Behind This Bitcoin Plunge

Author | Jeff Park (CIO of Bitwise)

Compiled by | Odaily (@OdailyChina)

Translator | DingDang (@XiaMiPP)

Editor's Note: On February 5th, the crypto market experienced another sharp decline, with over $2.6 billion liquidated within 24 hours. Bitcoin briefly crashed to $60,000. However, the market seems to lack a clear consensus on the cause of this drop. Bitwise CIO Jeff Park offers a new analytical framework from the perspective of options and hedging mechanisms.

As time passes and more data emerges, the picture is becoming clearer: this severe sell-off is likely related to Bitcoin ETFs, and the day itself was one of the most volatile trading days in capital markets in recent years. We can draw this conclusion because IBIT's trading volume hit a record high that day—exceeding $10 billion, double the previous record (an astonishing figure indeed), while options volume also set a new record (see chart below, showing the highest contract count since the ETF's launch). What was somewhat unusual compared to the past was the structure of the volume: this time, options trading was clearly dominated by puts, not calls (we will elaborate on this later).

Meanwhile, over the past few weeks, we have observed an extremely tight correlation between IBIT's price movements and software stocks, as well as other risk assets. Goldman Sachs' Prime Brokerage (PB) team also reported that February 4th was one of the worst single days on record for multi-strategy funds, with a Z-score as high as 3.5. This means it was an extreme event with a probability of only 0.05%, ten times rarer than a 3-sigma event (the classic "black swan" threshold, probability ~0.27%). It was a catastrophic shock. Typically, it is after such events that risk managers at multi-strategy funds (pod shops) quickly intervene, demanding all trading teams immediately, indiscriminately, and urgently deleverage. This explains why February 5th also turned into a bloodbath.

With so many records broken and a clear downward price direction (down 13.2% in a single day), we originally expected a high likelihood of seeing net redemptions from the ETFs. This judgment is not far-fetched based on historical data: for example, on January 30th, after a 5.8% drop the previous day, IBIT saw a record $530 million in redemptions; or on February 4th, IBIT saw about $370 million in redemptions amid consecutive declines. Therefore, in a market environment like February 5th, expecting at least $500 million to $1 billion in outflows was entirely reasonable.

But the opposite happened—we saw widespread net inflows. IBIT added approximately 6 million shares that day, corresponding to over $230 million in AUM growth. Meanwhile, other Bitcoin ETFs also recorded inflows, with the entire ETF system attracting over $300 million in net inflows.

This outcome is somewhat puzzling. Theoretically, one could imagine that the strong price rebound on February 6th somewhat alleviated redemption pressure, but turning "potentially reduced outflows" into "net inflows" is a completely different matter. This suggests that multiple factors were likely at play simultaneously, but these factors do not form a single, linear narrative framework. Based on the information we currently have, several reasonable premises can be proposed, and upon these, I will present my overall inference.

First, this round of Bitcoin selling likely impacted a type of multi-asset portfolio or strategy that is not purely crypto-native. This could be the multi-strategy hedge funds mentioned earlier, or funds like BlackRock's model portfolio business, which allocate between IBIT and IGV (software ETF) and were forced into automatic rebalancing during severe volatility.

Second, the acceleration of the Bitcoin sell-off was likely related to the options market, particularly structures related to the downside.

Third, this sell-off did not ultimately translate into capital outflows at the Bitcoin asset level, meaning the main driving force came from the "paper money system," i.e., position adjustments dominated by dealers and market makers, operating in an overall hedged state.

Based on the above facts, my current core hypotheses are as follows.

1. The direct catalyst for this sell-off was a broad deleveraging triggered by multi-asset funds and portfolios after downside correlations among risk assets reached statistically abnormal levels.
2. This process then triggered an extremely violent deleveraging, which also included Bitcoin exposure, but a significant portion of this risk was actually in "Delta-neutral" hedged positions, such as basis trades, relative value trades (e.g., Bitcoin vs. crypto stocks), and other structures where the residual Delta risk is typically "boxed" by the dealer system.
3. This deleveraging then triggered short Gamma effects, further amplifying the downward pressure, forcing dealers to sell IBIT. However, because the selling was too fierce, market makers had to go net short on Bitcoin regardless of their own inventory. This process, in turn, created new ETF inventory, thereby reducing the market's original expectation of large-scale outflows.

Subsequently, on February 6th, we observed positive inflows into IBIT, with some IBIT buyers (the question is, what type of buyers were these?) choosing to allocate on the dip after the decline, further offsetting what might have been a small net outflow.

First, I personally lean towards the view that the initial catalyst for this event came from the sell-off in software stocks, especially considering the high correlation Bitcoin showed with software stocks, even higher than its correlation with gold. Please refer to the two charts below.

This makes logical sense because gold is typically not an asset heavily held by multi-strategy funds engaged in financing trades, although it may appear in RIA model portfolios (a pre-designed asset allocation plan). Therefore, in my view, this further supports the judgment that the epicenter of this turmoil is more likely within the multi-strategy fund system.

This makes the second judgment more plausible: this violent deleveraging process indeed included hedged Bitcoin exposure. Take the CME Bitcoin basis trade as an example, one of the long-time favorite strategies of multi-strategy funds.

Looking at the complete data from January 26th to yesterday, covering CME Bitcoin basis movements for 30, 60, 90, and 120-day tenors (thanks to top industry researcher @dlawant for the data), we can clearly see the front-month basis jumped from 3.3% to as high as 9% on February 5th. This is one of the largest jumps we have personally observed in the market since the ETF launch, almost unequivocally pointing to one conclusion: basis trades were forced to unwind on a large scale under orders.

Imagine institutions like Millennium, Citadel, forced to unwind basis trade positions (sell spot, buy futures). Considering their size within the Bitcoin ETF system, it's easy to understand why this operation would violently impact the overall market structure. I have previously written about my reasoning on this point.

Odaily adds: The current large-scale, indiscriminate US-based selling likely originates from multi-strategy hedge funds. These funds often employ delta hedging strategies or run some relative value (RV) or factor-neutral trades, which are currently widening spreads, possibly accompanied by growth stock equity correlation spillover.

A rough estimate: about 1/3 of Bitcoin ETF holdings are institutional-type, and of that, about 50% (possibly more) are believed to be held by hedge funds. This is a significant amount of fast-moving capital that can easily capitulate and liquidate if financing costs or margin requirements rise in the current high-volatility environment and risk managers intervene, especially when the basis yield no longer justifies the risk premium. It's worth noting that MSTR's dollar trading volume today is among its highest in history.

This is why the biggest factor leading to hedge fund failures is the notorious "common holder risk": multiple seemingly independent funds hold highly similar exposures, and when the market turns down, everyone rushes towards the same narrow exit, causing all downside correlations to tend towards 1. Selling in such poor liquidity conditions is classic "risk-off" behavior, which we are seeing today. This will ultimately be reflected in the ETF flow data. If this hypothesis holds, I suspect prices will reprice quickly once this all clears, though rebuilding confidence will still take some time.

This leads to the third clue. Now that we understand why IBIT was sold amid broad deleveraging, the question becomes: what accelerated the downside? A possible "accelerant" is structured products. While I don't believe the structured products market is large enough to trigger this sell-off alone, when all factors align abnormally and perfectly in a way beyond any VaR (Value at Risk) model's expectations, they can certainly become the acute event triggering cascading liquidations.

This immediately reminds me of my experience working at Morgan Stanley. There, structured products with knock-in put barriers (where the option only "activates" into a valid put when the underlying asset price touches/crosses a specific barrier level) often caused highly destructive consequences. In some cases, the change in option Delta could even exceed 1, a phenomenon not even considered in the Black-Scholes model—because in the standard Black-Scholes framework, for plain vanilla options (the most basic European call/put), an option's delta can never exceed 1.

Take a note priced by J.P. Morgan last November as an example; its knock-in barrier was set exactly at 43.6. If these notes continued to be issued in December and Bitcoin price fell another 10%, one can imagine a pile-up of knock-in barriers in the 38–39 range, the so-called "eye of the storm."

When these barriers are breached, if dealers hedged the knock-in risk by selling puts, etc., under negative Vanna dynamics, Gamma changes can be extremely rapid. In such a scenario, the only viable response for a dealer is to aggressively sell the underlying asset as the market weakens. This is precisely what we observed: implied volatility (IV) collapsed to near 90%, a historical extreme, almost reaching disaster-level squeeze conditions. In this situation, dealers had to expand their IBIT short positions to the extent of ultimately creating net new ETF shares. This part indeed requires some degree of inference and is difficult to fully confirm without more detailed spread data, but given the record volume that day and the deep involvement of Authorized Participants (APs), this scenario is entirely possible.

Combining this negative Vanna dynamic with another fact makes the logic clearer. Due to the low overall volatility in the recent period, crypto-native market clients have generally favored buying puts over the past few weeks. This means crypto dealers were naturally in a short Gamma state and underpricing potential outsized moves. When the large move arrived, this structural imbalance further amplified the downside pressure. The position distribution chart below clearly shows this, with dealers concentrated in short Gamma positions on puts in the $64k to $71k range.

This brings us back to February 6th, when Bitcoin staged a strong rebound of over 10%. A notable phenomenon then was that CME's open interest (OI) expanded significantly faster than Binance's (again thanks to @dlawant for aligning hourly data to 4 PM ET). From February 4th to 5th, a clear collapse in CME OI is visible, again confirming the judgment of large-scale basis trade unwinding on February 5th; on February 6th, these positions may have been re-established to take advantage of higher basis levels, thereby offsetting outflow effects.

At this point, the entire logical chain closes: IBIT roughly balanced between creations and redemptions because CME basis trades have resumed; but prices remain depressed because Binance's OI showed a clear collapse, meaning a significant portion of the deleveraging pressure came from short Gamma positions and liquidations within the crypto-native market.

The above is my best explanation for the market performance on February 5th and the subsequent February 6th. This reasoning is built on several assumptions and is not entirely satisfying because it lacks a clear "culprit" to blame (like the FTX incident). But the core conclusion is this: The trigger for this sell-off came from traditional finance de-risking behavior outside crypto, and this process happened to push Bitcoin prices into a range where short Gamma hedging would accelerate the decline. This decline was not driven by directional bearishness but triggered by hedging needs, and ultimately reversed rapidly on February 6th (unfortunately, this reversal primarily benefited market-neutral capital in traditional finance, not crypto-native directional strategies). While this conclusion may not be exciting, it is at least somewhat reassuring that the previous day's sell-off likely has nothing to do with a 10/10 event.

Yes, I do not believe what happened last week is a continuation of the 10/10 deleveraging process. I read an article suggesting the turmoil might have originated from a non-US, Hong Kong-based fund that engaged in a failed yen carry trade. But this theory has two obvious flaws. First, I don't believe a non-crypto prime broker would service such complex multi-asset trades while also providing a 90-day margin buffer without falling into insolvency earlier when risk frameworks tightened. Second, if the carry trade capital was "exiting" by buying IBIT options, then the Bitcoin price drop itself wouldn't accelerate risk release—these options would just go out-of-the-money, their Greeks rapidly decaying to zero. This means the trade itself must contain real downside risk. If someone was long USD/JPY carry and selling IBIT puts, frankly, such a prime broker doesn't deserve to exist.

The next few days will be critical, as we will get more data to judge whether investors are using this dip to build new demand. If so, that would be a very bullish signal. For now, I am quite encouraged by the potential ETF inflows. I still firmly believe that true RIA-style ETF buyers (not relative value hedge funds) are sophisticated investors, and at the institutional level, we are seeing substantial, real, and profound progress, evident throughout the industry's advancement and among my friends at Bitwise. For this reason, I focus on net inflows not accompanied by basis trade expansion.

Finally, all this also shows once again that Bitcoin has integrated into the global financial capital markets in an extremely complex and mature way. This also means that when the market is on the side of a short squeeze in the future, the upside will be steeper than ever before.

The fragility of traditional finance margin rules is precisely Bitcoin's antifragility. Once the price rebound comes—and I believe it is inevitable, especially after Nasdaq raised its options open interest cap—it will be an extremely spectacular move.