Crypto markets experienced a dramatic sell-off this week, with Bitcoin plummeting nearly $15,000 in a single day – the largest single-day decline since the collapse of FTX in 2022. While the cryptocurrency has since recovered some ground, trading around , , at approximately $70,000, the episode has sparked intense scrutiny and a search for the underlying cause.
One compelling theory gaining traction points to the potential implosion of leveraged Bitcoin bets placed by Hong Kong-based hedge funds. The hypothesis, initially outlined on X by Parker White, COO of DeFi Development Corporation, suggests these funds held call options on BlackRock’s IBIT, the world’s largest Bitcoin exchange-traded fund (ETF).
White’s analysis centers on a complex trading strategy involving the Japanese Yen carry trade – a form of interest rate arbitrage. The funds allegedly used borrowed Yen to finance substantial positions in out-of-the-money IBIT call options, essentially betting on a recovery in Bitcoin prices following a sell-off that began in . This bet soured as Bitcoin failed to rally, and the funds simultaneously faced increasing financing costs due to headwinds in the Yen carry trade and exposure to volatility in the silver market.
The confluence of these factors created a “perfect storm,” according to White. As the crypto market continued to decline, the value of the hedge funds’ holdings plummeted, triggering liquidations and forcing a mass sell-off of IBIT shares, which in turn accelerated Bitcoin’s downward spiral. White explained the situation in trading terminology: “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.”
A key element of White’s theory is that these hedge funds operated primarily through ETF shares, remaining largely outside the traditional crypto ecosystem. This lack of visibility meant their struggles didn’t surface on platforms like “Crypto Twitter,” and there were no immediate counter-parties to warn of potential losses. This relative opacity contributed to the speed and severity of the market downturn.
While White’s explanation remains a theory, it has garnered support from other industry observers. Haseeb Qureshi, a respected venture capitalist, described the hypothesis as plausible, acknowledging that confirming it may require months of regulatory filings and that identifying the specific fund(s) involved could prove difficult. A Polymarket forum has even been established to allow participants to bet on which hedge fund may be responsible.
It’s important to note that major Bitcoin crashes are rarely attributable to a single event. This week’s market turmoil coincided with a broader sell-off in AI-related assets, uncertainty surrounding a key blockchain bill, and the surfacing of crypto-related names in connection with the Epstein files – all factors that likely contributed to the overall market pressure. However, the Hong Kong hedge fund theory offers a particularly compelling narrative, potentially explaining the scale and speed of the recent decline.
The theory is further supported by a recent decision by the Securities and Exchange Commission to remove limits on trading Bitcoin options. This deregulation could have facilitated the type of leveraged trading activity that White suggests contributed to the crisis. The increased availability of options contracts may have allowed funds to take on larger, riskier positions, amplifying the impact of any adverse market movements.
The surge in options trading on BlackRock’s IBIT ETF, with a record 2.33 million contracts traded on , representing $900 million in premiums, underscores the growing influence of derivatives markets in the crypto space. As IBIT has become a primary vehicle for institutional investors seeking Bitcoin exposure, activity in its options market is increasingly indicative of broader market sentiment and risk positioning. The record volume observed during the crash suggests a significant increase in hedging activity, potentially driven by concerns about further downside risk.
The events of this week serve as a stark reminder of the inherent volatility of the cryptocurrency market and the risks associated with leveraged trading. While Bitcoin has demonstrated resilience in the past, recovering much of its initial losses, the episode highlights the potential for rapid and significant price swings, even in a market increasingly dominated by institutional investors. The coming weeks and months will be crucial in determining the full extent of the damage and identifying the specific factors that triggered this latest bout of market turbulence.
