Crypto prices got absolutely nuts this week with Bitcoin dropping nearly $15,000 in 24 hours—a bloodbath not seen since the collapse of Sam Bankman-Fried’s empire back in 2022. On Friday, Bitcoin had recovered most of those losses, and is now trading around $70,000, but it has left every other long-term episode. happened?!” There are many theories swirling around, but one is particularly compelling: The cause of the crash lies in Hong Kong traders who placed highly leveraged Bitcoin bets that went horribly wrong.
That theory was brought up on X by Parker White, a former equity trader who is now COO at a crypto firm called DeFi Development Corporation. In a long thread, White said there is evidence pointing to the sudden implosion of Hong Kong hedge funds that held call options in BlackRock’s IBIT, which is the world’s largest Bitcoin ETF.
White suggests that hedge funds have used the Yen carry trade (a form of interest arbitrage) to fund large positions in out-of-the-money IBIT options. This amounted to a risky bet that Bitcoin prices, which have been declining since a big sell-off in October, would recover. The hoped-for rally, however, did not come. Meanwhile, White speculates that Hong Kong funds have also been hampered by headwinds in the Yen-carry trade—which have made their financing more expensive—and exposure to recent convulsions in the silver market.
The result is that hedge funds faced a perfect storm and, as the crypto market fell further this week, the value of their holdings declined until they were liquidated—forcing a mass sell-off of IBIT shares and a magnetic fall for Bitcoin. Here’s how White explained what happened in the trader:
Now, I could easily see how the fund(s) could have been running a leveraged options trade on IBIT (think OTM calls = ultra high gamma) with borrowed capital in JPY. October 10th could very well have blown a hole in their balance sheet, which they tried to win back by increasing leverage waiting for the “obvious” rebound. As this led to increased losses, along with increased funding costs in JPY, I could see how the fund(s) would have become more desperate and jumped on the Silver trade. When this blew up, things got dire and this last push in BTC ended them.
In his post, White also pointed out that Hong Kong hedge funds, whose Bitcoin trading took place only in the form of ETF shares, are not part of the traditional crypto ecosystem. This means that the chatter about their predicament did not sit on “Crypto Twitter”—which is the go-to forum for industry news—nor did it create counterparts who suffered heavy losses, and are likely to warn others.