Author: ChandlerZ, Foresight News
When the market experiences a sharp decline, narratives often quickly seek an identifiable source.
Recently, the market has begun to delve into discussions regarding the plunge on February 5 and the rebound close to $10,000 on February 6. Jeff Park, Chief Investment Officer at ProCap and Bitwise advisor, believes that this volatility is more closely linked to the Bitcoin spot ETF system than the outside world imagines, with key clues concentrated in the secondary market and options market of BlackRock's iShares Bitcoin Trust (IBIT).
He pointed out that on February 5, IBIT saw record trading volume and options activity, with transaction sizes significantly higher than usual, while the options trading structure leaned towards put options. More counterintuitively, based on historical experience, if the price experiences a double-digit drop in a single day, the market usually sees significant net redemptions and capital outflows; however, the opposite occurred. IBIT recorded net creations, with new shares driving the scale up, and the entire spot ETF portfolio also saw net inflows.
Jeff Park believes that this combination of "plunge and net creation coexisting" weakens the explanatory power of the single pathway that ETF investors' panic redemptions caused the decline. Instead, it aligns more with the traditional financial system's internal deleveraging and risk reduction, where traders, market makers, and multi-asset portfolios are forced to reduce risk under derivatives and hedging frameworks. The selling pressure comes more from adjustments in positions and hedging chains within the paper money system, ultimately transmitting the impact to Bitcoin prices through IBIT's secondary market trading and options hedging.
Many discussions in the market easily connect IBIT's institutional liquidation directly to the market's driven plunge, but if this causal chain is not broken down into its mechanisms, it is easy to reverse the order. The secondary market trading of ETFs targets ETF shares, while the creation and redemption in the primary market correspond to changes in the BTC held in custody. Directly linearly mapping the secondary market's trading volume to an equivalent amount of spot selling lacks several necessary explanatory links.
The so-called "IBIT triggers large-scale liquidation" actually debates the transmission path
The controversy surrounding IBIT mainly revolves around which layer of the ETF market and through what mechanism the pressure is transmitted to the price formation end of BTC.
A more common narrative focuses on net outflows in the primary market. Its intuition is simple: if ETF investors panic and redeem, the issuer or authorized participants need to sell the underlying BTC to meet the redemption price, leading to selling pressure in the spot market, further causing price declines and triggering forced liquidations.
This logic sounds complete but often overlooks a fact. Ordinary investors and the vast majority of institutions cannot directly subscribe to or redeem ETF shares; only authorized participants can create and redeem in the primary market. The commonly referred to "daily net inflows and outflows" points to changes in the total amount of shares in the primary market. No matter how large the secondary market transactions are, they only change the holders of the shares and do not automatically change the total amount of shares, nor do they automatically lead to increases or decreases in the BTC held in custody.
Analyst Phyrex Ni stated that the liquidation Parker referred to is actually the liquidation of the IBIT spot ETF, not the liquidation of Bitcoin. For IBIT, what is bought and sold in the secondary market is only the IBIT share, which is price-anchored to BTC, but the trading behavior itself is completed internally within the securities market.
The only part that truly touches BTC occurs in the primary market, which is the creation and redemption of shares, and this channel is executed by APs (which can be understood as market makers). During creation, new IBIT shares require APs to provide corresponding BTC or cash consideration, and BTC will enter the custody system, constrained by regulations, and the issuer and related institutions cannot use it arbitrarily. During redemption, the custody side will hand over BTC to the AP, who will complete the subsequent disposal and settle the redemption funds.
ETFs are essentially two-layer markets, with the primary market mainly involving the buying and redeeming of Bitcoin, which is almost entirely provided by APs for liquidity. This is fundamentally similar to generating USDC with USD, and APs rarely circulate BTC through exchanges, so the primary utility of buying a spot ETF is to lock in the liquidity of Bitcoin.
Even if a redemption occurs, the AP's selling behavior does not necessarily need to go through the public market, especially not through the exchange's spot market. APs may hold inventory BTC themselves or can complete delivery and fund arrangements in a more flexible manner within the T+1 settlement window. Therefore, even during the large-scale liquidation on January 5, BlackRock's investors redeemed less than 3,000 BTC, and the total BTC redeemed by all spot ETF institutions in the U.S. was less than 6,000 BTC, meaning the maximum amount of Bitcoin sold to the market by ETF institutions was only 6,000 BTC. Moreover, these 6,000 BTC were not necessarily all transferred to exchanges.
What Parker referred to as the liquidation of IBIT actually occurred in the secondary market, with a total trading volume of approximately $10.7 billion, marking the largest trading volume in IBIT's history. It indeed triggered some institutional liquidations, but it is important to note that this part of the liquidation was only the liquidation of IBIT, not the liquidation of Bitcoin. At least this part of the liquidation did not transmit to IBIT's primary market.
Thus, the significant drop in Bitcoin only triggered the liquidation of IBIT but did not result in BTC liquidation caused by IBIT. The secondary market trading target of the ETF is essentially still the ETF, while BTC is merely the price anchor of the ETF. The only market impact that can occur is from the primary market's selling of BTC leading to liquidation, not from IBIT. In fact, although BTC's price dropped over 14% on Thursday, the net outflow of BTC in the ETF only accounted for 0.46%. On that day, the BTC held by the ETF totaled 1,273,280 BTC, with a total outflow of 5,952 BTC.
Transmission from IBIT to Spot
@MrluanluanOP believes that when the long positions in IBIT are liquidated, concentrated selling will occur in the secondary market. If the market's natural buying support is insufficient, IBIT may trade at a discount relative to its implied net asset value. The larger the discount, the greater the arbitrage opportunity, and APs and market arbitrageurs will have more motivation to take on the discounted IBIT, as this is part of their basic profit-making strategy. As long as the discount is sufficient to cover costs, there will theoretically always be professional funds willing to take on the position, so there is no need to worry about "selling pressure with no one to take it."
However, once they take on the position, the issue shifts to risk management. After APs take on IBIT shares, they cannot immediately redeem and liquidate this batch of shares at the current price due to time and process costs associated with redemption. During this time, the prices of BTC and IBIT will still fluctuate, exposing APs to net exposure risk, prompting them to hedge immediately. The hedging method may involve selling spot inventory or opening short positions in the futures market.
If the hedging falls on spot selling, it will directly pressure the spot price; if it falls on futures shorting, it will first manifest as changes in spreads and basis, and then further influence the spot market through quantification, arbitrage, or cross-market trading.
After the hedging is completed, APs will have a relatively neutral or fully hedged position, allowing them to flexibly choose when to handle this batch of IBIT. One option is to redeem with the issuer on the same day, which will reflect as redemptions and net outflows in the official inflow and outflow data after the market closes. Another option is to choose not to redeem immediately, waiting for secondary market sentiment to recover or for prices to rebound before selling the IBIT back to the market, thus completing the entire transaction without going through the primary market. If IBIT returns to a premium or the discount narrows the next day, APs can sell their holdings in the secondary market to realize profit from the price difference while closing out the previously established futures short position or replenishing the previously sold spot inventory.
Even if the final share handling mainly occurs in the secondary market, the primary market may not show significant net redemptions. The transmission of IBIT to BTC may still occur because the hedging actions taken by APs when taking on discounted positions will transfer pressure to the spot or derivatives market of BTC, thus forming a link where the selling pressure from the IBIT secondary market spills over to the BTC market through hedging actions.
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