What triggered the dramatic plunge in Bitcoin's value? Insights suggest a significant failure among hedge funds based in Hong Kong. Just this week, cryptocurrency values took a severe hit, with Bitcoin plummeting by nearly $15,000 within just 24 hours—an event reminiscent of the collapse associated with crypto fraudster Sam Bankman-Fried’s empire in 2022. Although Bitcoin managed to recover slightly, trading around $70,000 on Friday, this turbulent episode has left even seasoned crypto experts bewildered, questioning, "What just occurred?!" While numerous theories are circulating, one particularly stands out: the crash may have originated from high-leverage Bitcoin investments made by Hong Kong traders that ultimately backfired.
This theory was articulated by Parker White, a former equities trader and current COO at DeFi Development Corporation, in a detailed post on X. In his analysis, White highlights evidence that points toward the abrupt collapse of hedge funds in Hong Kong that had invested in call options for BlackRock’s IBIT, which is recognized as the largest Bitcoin ETF globally.
White proposes that these hedge funds employed the Yen carry trade—a strategy involving interest arbitrage—to fund substantial positions in out-of-the-money IBIT options. This move represented a risky bet that Bitcoin prices, which had been declining since a significant market sell-off in October, would rebound. Unfortunately, the anticipated price surge did not materialize. Additionally, White theorizes that these Hong Kong funds faced considerable challenges due to rising costs in the Yen-carry trade and their exposure to recent fluctuations in the silver market.
As a result, the hedge funds encountered a series of compounding challenges. With the crypto market continuing to decline this week, the value of their assets diminished to the point of liquidation—prompting a widespread sell-off of IBIT shares and a catastrophic drop in Bitcoin’s price. White explained this in trader terminology:
"I could easily envision how the fund(s) might have engaged in a leveraged options trade on IBIT (consider it akin to ultra high gamma with way OTM calls) using borrowed capital in JPY. The events of October 10th likely created a gap in their balance sheets, leading them to increase leverage in anticipation of an ‘obvious’ recovery. As losses mounted, coupled with escalating financing costs in JPY, it’s plausible that the fund(s) grew increasingly desperate and turned to the silver trade. When that turned sour, their situation became dire, and this final push in BTC sealed their fate."
In his commentary, White emphasized that these Hong Kong hedge funds, which engaged in Bitcoin transactions solely through ETF shares, operate outside the traditional crypto ecosystem. Consequently, discussions about their difficulties didn't permeate "Crypto Twitter," the primary platform for industry news, nor did it create counter-parties who could sustain significant losses and caution others.
Of course, White's explanation remains just a theory. Historical trends indicate that major Bitcoin crashes often arise from a confluence of factors rather than a singular cause. In fact, this week’s downturn coincided with broader sell-offs linked to AI assets, uncertainty surrounding a crucial blockchain legislation, and references to crypto entities in the Epstein files—all of which likely played a role in Thursday's collapse.
Nevertheless, White’s account is compelling and gains further credence from additional circumstantial evidence, including the Securities and Exchange Commission’s recent decision to remove restrictions on Bitcoin option trading.
Other prominent figures in the crypto space have cautiously acknowledged the Hong Kong hedge fund hypothesis. Esteemed venture capitalist Haseeb Qureshi described the theory as plausible but cautioned that confirming it could take months through regulatory filings, emphasizing that sometimes key players in the crypto sphere can fail without revealing their identities. For those convinced that a hedge fund is behind this week’s market turmoil, a Polymarket forum now exists where speculation about the responsible party can take place.
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About the Author: Jeff John Roberts serves as the Finance and Crypto editor at Fortune, overseeing coverage related to blockchain technology and its impact on finance.
