The article I read today that most recently answered my question was "Why Did Bitcoin Crash? The Answer Is Hong Kong Hedge Funds." Original text
😐 One-line summary?
This decline isn't a simple panic; it's a leverage collapse involving ETFs, options, and global macro. Hong Kong hedge funds invested heavily in BlackRock's IBIT call options, using yen carry trade funds, and OTM (Out of the Money) call options with a large price discrepancy, believing Bitcoin would skyrocket in the short term. They then went bankrupt.
🤐 Why is this a problem? 1. Expected a Bitcoin rebound, but price recovery failed.
2. Yen carry trade environment worsened => increased borrowing costs.
3. Simultaneously held a position in silver.
4. Added leverage to recover losses => worsened the situation.
5. Ultimately, margin calls and forced liquidations occurred.
6. Massive IBIT selloffs => triggered a sharp drop in Bitcoin prices.
👮♂️But why didn't anyone know?
Because they only traded Bitcoin ETFs, not on-chain transactions.
+) This didn't happen before the spot ETF was approved, but CME options existed. Because CME options were futures options and were settled numerically, there was no need to buy or sell Bitcoin.
The current issue is that ETF options are based on the spot Bitcoin ETF as the underlying asset. Therefore, the options and the spot ETF are matched 1:1. If the price fluctuates and the delta or gamma shifts to one side, the MM must buy or sell IBIT spot.
=> However, because this trade was OTM, there was no need for the MM to buy a lot of IBIT when the hedge funds took the trade. (When the MM sells the option, they buy IBIT spot for hedging, but since the delta is already small, there's no need to buy a lot.)
=> However, as the price of Bitcoin falls, the MM's IBIT holdings become excess inventory. Therefore, they must mechanically sell all the IBIT they bought during the decline. (The OTM moves further away, the gamma decreases, and the delta decreases to zero, achieving delta neutrality.) (for)
=> It was quiet when buying, and when selling, it fell without even time to figure out why.
I think it was good when Grayscale was locked in and couldn't get out. Also, the reason no one was able to sell was probably because liquidity thinned after 1010.... But still, I thought, "Isn't this enough to get out?" 😎
Of course, this is a hypothesis, but it feels clearer than Michael Burry's hyperliquid-silver RWA-Bitcoin collateral..? Both probably played a role, though...
Anyway, after seeing this incident, I knew the importance of RWA, but honestly, I wondered if it was a bit necessary. But seeing this, I think it's right to integrate ETFs and options on-chain. ;;;;;;;
