Bitwise advisor Jeff Park attributed the February 5 cryptocurrency sell-off to multi-asset portfolio deleveraging rather than crypto-specific factors.
Summary
- The sales on February 5 were driven by deleveraging of multi-asset funds, not fear of cryptocurrencies.
- CME’s core operations unraveled violently as capsule stores defunded all portfolios.
- Short range and structured product coverage amplified the decline despite ETF inflows.
IBIT recorded 10 billion in trading volume, doubling its previous high, while options activity reached all-time highs led by put contracts rather than calls.
The drop saw Bitcoin (btc) fell 13.2%, but IBIT recorded $230 million in net creations with 6 million new shares, bringing total ETF inflows to over $300 million.
Goldman Sachs’ prime brokerage desk reported that February 4 was one of the worst daily results 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 risk managers at capsule stores forced indiscriminate reduction, which explains why February 5 turned into a bloodbath.
CME Base Trade Liquidation Fueled Violent Deleveraging
Park identified CME base trading as the main driver of selling pressure. The near-date basis jumped from 3.3% on February 5 to 9% on February 6, one of the biggest moves seen since the ETF’s launch.
Multi-strategy funds like Millennium and Citadel hold large positions in the complex Bitcoin ETF and were forced to unwind basis trades by selling spot while buying futures.
The IBIT showed a close correlation with software stocks more than gold in recent weeks. Multi-strategy funds do not typically hold gold as part of funding transactions, confirming that the drama centered on these funds and not retail investment advisors.
The catalyst originated from software stock sell-offs rather than cryptocurrency sales.
Structured products created a crypto bloodbath
Products structured with impact barrier features contributed to sales acceleration. A JPMorgan note listed in November had a barrier of $43,600.
Bonds listed in December, when Bitcoin fell 10%, would have barriers in the range of $38,000 to $39,000.
Buying behavior in the crypto-native markets over the previous weeks meant that cryptocurrency traders held naturally short gamma positions.
Options were sold too cheaply relative to the outsized moves that eventually materialized, compounding the downside. Traders maintained a short gamma on puts in the range of $64,000 to $71,000.
The rally on February 6 caused CME’s open interest to expand faster than Binance. Base trading partially recovered, offsetting exit effects, while Binance’s open interest collapsed.
Park concluded that reduced trading risk was the catalyst that pushed Bitcoin to levels where short gamma covering increased drawdowns through non-directional activity that required additional inventory.
