Bitwise advisor Jeff Park attributed the February 5 crypto selloff to multi-asset portfolio deleveraging rather than crypto-specific factors.
Summary
- The February 5 sell-off was driven by deleveraging among multi-asset funds, not fear of cryptocurrencies.
- CME based trading unraveled violently as pod stores declined in wallets.
- Hedging of short gamma and structured products amplified the decline despite ETF inflows.
IBIT recorded a trading volume of 10 billion, double its previous record, while options activity reached historic levels, driven by puts rather than calls.
The crash saw Bitcoin (BTC) fall 13.2%, but IBIT saw $230 million in net creations with 6 million new shares, bringing total ETF inflows to over $300 million.
Goldman Sachs’ prime brokerage office reported that February 4 was one of the worst daily performances for multi-strategy funds, with a z-score of 3.5. This was an event with a probability of 0.05%, 10 times rarer than a three sigma event.
Park wrote that pod store risk managers forced indiscriminate degreasing, explaining why February 5 turned into a bloodbath.
The unwinding of trade on the basis of CMEs led to violent deleveraging
Park identified the CME basis trade as the main driver of the selling pressure. The quasi-dated basis increased from 3.3% on February 5 to 9% on February 6, one of the largest moves seen since the ETF’s launch.
Multi-strategy funds like Millennium and Citadel hold large positions in the Bitcoin ETF complex and have been forced to unwind basis trades by selling spot while buying futures.
IBIT has shown a close correlation with software stocks rather than gold in recent weeks. Gold is not typically held by multi-strategy funds in financing transactions, confirming that the drama has focused on these funds rather than retail investment advisors.
The catalyst comes from the sale of software titles rather than the sale of native cryptocurrencies.
Structured products have created a crypto bloodbath
Structured products with activation barriers have contributed to the acceleration of sales. A JPMorgan stock priced in November had a barrier at $43,600.
Notes priced in December, when Bitcoin fell 10%, would have barriers between $38,000 and $39,000.
Buying behavior in crypto-native markets in previous weeks meant that crypto dealers were holding naturally short gamma positions.
The options were sold too cheaply relative to the outsized moves that eventually materialized, exacerbating the decline. Dealers held short positions in put options between $64,000 and $71,000.
The February 6 rally saw CME open interest increase faster than Binance. Basis trading partially recovered, offsetting outflow effects while Binance open interest collapsed.
Park concluded that reduced trade risk was the catalyst that pushed Bitcoin to levels where short-term gamma hedging accelerated declines through non-directional activity requiring additional inventory.
