Commenting on the sharp drop in the cryptocurrency market on February 5th, Bitwise CIO Jeff Park said that the sell-off may have stemmed from technical and derivatives market dynamics rather than a fundamental development.
According to Park, at the heart of the matter is the aggressive risk mitigation process, particularly in Bitcoin ETFs and multi-asset funds.
Park noted that on February 5th, the day of the sharp sell-off, IBIT more than doubled its previous record with a trading volume exceeding $10 billion, and also reached its highest number of contracts since launch in the options market. Particularly noteworthy was the dominance of put (sell) options over call (buy) options. This indicated increased demand for hedging against downside risks. The fact that IBIT’s price movements showed a very high correlation with software stocks and other risky assets during the same period suggested that the sell-off was not unique to cryptocurrency.
According to Park, February 4th saw a statistically extremely rare performance decline for multi-strategy funds. Goldman Sachs’ prime brokerage unit described this day as an event with a z-score of 3.5, meaning it has approximately a 0.05% probability of occurring.
It is a common process for risk managers to quickly intervene and issue position reduction orders following such anomalies. According to Park, the “red chart” on February 5th was a continuation of this necessary risk reduction.
Despite a 13.2% drop in Bitcoin’s price, the expected net outflow from ETFs did not materialize. While historical data suggested hundreds of millions of dollars in outflows, IBIT saw the creation of approximately 6 million new shares, resulting in an increase of over $230 million in assets. Other Bitcoin ETFs also recorded inflows totaling over $300 million.
Park described the chart as “surprising,” arguing that the sell-off may have stemmed from derivative and dealer-related technical trading rather than spot asset outflows.
According to Park’s hypothesis, the primary trigger for the sell-off was the widespread reduction in leverage in multi-asset funds. During this process, delta-neutral (hedged) Bitcoin positions were unwinded, the short-term basis rate on the CME jumped from 3.3% to 9%, and large funds closed positions by selling spot and buying futures.
Following the sharp drop on February 5th, Bitcoin recovered by over 10% on February 6th. Park noted that the rapid increase in CME open positions was influential in this recovery, but that open positions on Binance had collapsed. This picture shows that market-neutral strategies in traditional finance are being reactivated, while crypto-specific directional positions continue to be liquidated.
According to Park, the reason for the Bitcoin sell-off on February 5th was not a fundamental breakdown, but rather the growth of risk reduction, which began in multi-asset funds and spread through derivative markets.
Park also believes the sell-off is not linked to a structural crisis similar to the October 10th crash. He considers the claim that it was the collapse of an Asia-based fund engaged in Japanese yen carry trade to be weak on technical grounds.
According to Park, what’s happening shows that Bitcoin is now deeply integrated into the traditional financial system. While this integration could create fragility in the short term, it also suggests that the movement could be much more vertical if a short squeeze occurs.
*This is not investment advice.
