The upshot is the hedge funds faced a perfect storm and, as the crypto market slumped further this week, the value of their holdings declined until they got liquidated—forcing the mass sell-off of IBIT shares and a calamitous fall for Bitcoin. Here is how White explained what happened in trader-speak:
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.
In his post, White also pointed out that the Hong Kong hedge funds, whose Bitcoin trading occurred only in the form of ETF shares, are not part of the traditional crypto ecosystem. This means that chatter about their predicament did not bubble up on “Crypto Twitter”—which is the go-to forum for industry news—and nor did it create counter-parties who incurred big losses, and would be likely to warn others.
White’s theory is just that, of course: no more than a theory. Meanwhile, history shows that major Bitcoin crashes have typically been touched off by multiple factors, not a single event. And indeed, this week’s crypto crackup coincided with a broader AI-related asset sell-off, uncertainty over the fate of a key blockchain bill, as well as crypto names appearing in the Epstein files—factors that all likely contributed to Thursday’s meltdown.
Still, White’s explanation is the most persuasive, and is further supported by other circumstantial evidence, including a recent decision by the Securities and Exchange Commission to lift limits on trading Bitcoin options.
