Bitcoin touched $60,000 on the morning of February 6th, experiencing an extreme drop of 50% from its all-time high. However, the BlackRock Bitcoin ETF (IBIT) saw record trading volume and net inflows. Jeff Park, former head of strategy at Bitwise Alpha, stated that the increasingly close integration of Bitcoin with traditional capital markets was a major reason for the sharp price decline. Many analysts had previously expected that the approval of Bitcoin ETFs and the influx of institutional funds would gradually mature Bitcoin and reduce volatility. However, recent market dynamics have demonstrated the opposite: the introduction of traditional financial instruments has actually amplified volatility.
The paradox of fund flows under Bitcoin price correction
A highly counterintuitive phenomenon has recently emerged in the market: despite a 13.2% single-day drop in Bitcoin's price, IBIT did not experience the large-scale redemptions typically seen in historical data. Historically, smaller price drops have often been accompanied by outflows of hundreds of millions of dollars. However, this time, IBIT not only avoided net outflows but also recorded approximately 6 million new creations, increasing its assets under management (AUM) by over $230 million. This "large volume, falling price, yet net inflow" suggests that the sell-off was not solely driven by panic selling from ETF investors, but rather a result of structural adjustments made by traditional financial institutions in managing inventory and hedging risks.
The chain reaction triggered by traditional financial deleveraging
Park points out that the catalyst for this sell-off primarily stemmed from multi-strategy funds in traditional finance (TradFi). Given Bitcoin's recent high positive correlation with risk assets like software stocks, when traditional markets experience statistically rare pullbacks (such as the 3.5 standard deviation event cited by Goldman Sachs' PB division), risk management models trigger a mandatory deleveraging mechanism. This forces institutions to indiscriminately close positions, including a large number of Delta-neutral strategies, such as basis arbitrage trades between CME futures and spot prices. Data shows a sharp jump in the CME basis within a very short period, confirming that large institutions are unwinding these arbitrage positions, thus putting pressure on spot prices.
Derivatives Accelerate Price Decline
Beyond the spot market sell-off, mechanical hedging in the derivatives market further accelerated the decline. As prices hit key support levels, the "negative gamma" effect in the options market forced traders to aggressively short to hedge risk during the downtrend. Furthermore, potential structured products (such as those hitting KI put barriers) could trigger a chain of liquidations. However, it was precisely this selling pressure generated by market makers' hedging demand that created new inventory demand, explaining why ETFs ultimately saw net inflows: market makers replenishing their inventories after the sharp price fluctuations, coupled with long-term allocation funds (such as RIA investment advisors) buying on dips, ultimately offset the outflow pressure and resulted in net inflows.
BitMex founder Arthur Hayes also believes that the recent plunge in Bitcoin prices may be due to traders using IBIT structured products for hedging.
The entry of traditional financial institutions has exacerbated Bitcoin volatility.
Many analysts previously anticipated that the listing of Bitcoin ETFs and the influx of institutional funds would lead to Bitcoin's maturation and reduced volatility. However, recent market developments have demonstrated the opposite: the introduction of traditional financial instruments has actually amplified volatility.
Even Bloomberg ETF analyst Eric Balchunas has expressed remorse for this, but he still insists on comparing Bitcoin to hot sauce, and that it will remain so for at least the foreseeable future.
Confession: While I was right (so far) that the btc ETF investors would be stronger than ppl thought, I was wrong when I said we'd see less wild volatility. I'll take the L there. I thought ETFs retail replaced dumdum pre-FTX retail = more stability but what I didn't factor in… https://t.co/fkAI0nvlS3
— Eric Balchunas (@EricBalchunas) February 7, 2026
This article, "The Truth Behind Bitcoin's Crash: The Entry of Traditional Financial Institutions Actually Increased BTC Volatility," first appeared on ABMedia, a ABMedia .
