Bitwise Advisor Review 2/5 Bitcoin Flash Crash Reason: Traditional Fund Bursts, Coin Circle Only Affected

Author: Jeff Park Compiled: Deep Tide TechFlow Deep Tide Introduction: Jeff Park, Bitwise Advisor and ProCap Chief Investment Officer, reviewed the real reasons for the 13.2% drop in Bitcoin on February 5th in this long article. He believes that this is not a fundamental driven sell-off, but a technical chain collapse triggered by deleveraging of traditional financial multi strategy funds and amplified by bearish gamma in the options market. The most crucial data: IBIT's trading volume exceeded $10 billion on that day, setting a record, but ETF fund flow was a net inflow. This analysis is very valuable for understanding the deep nested relationship between Bitcoin and traditional capital markets. After the article, the author also said in the comment section that if you accept this opportunity, a great chance is right in front of you. What happened on February 5th? As more data comes out, one thing becomes increasingly clear: that intense sell-off was related to the Bitcoin ETF and occurred on the most brutal day of the capital market. How do we know? Because IBIT has set a historical trading volume record (over $10 billion, double the previous record), options trading volume has also reached the highest number of contracts since the ETF went public. Unlike before, this option activity is dominated by put options, with trading volume clearly biased towards sellers. This will be discussed later. Caption: Historical trading volume data of IBIT recorded a record high on 2/5. Caption: The total trading volume of IBIT options and the number of contracts on the same day reached the highest level since the ETF's listing. At the same time, the price trend of IBIT has shown a strong correlation with software stocks and other risk assets in the past few weeks. According to data from Goldman Sachs' PB (Prime Broker) department, February 4th was one of the worst days in the history of multi strategy funds, with a z-score of 3.5. What does this mean? This is a 0.05% probability event, which is 10 times rarer than a 3-fold standard deviation event. It can be said to be catastrophic. Caption: Source: Goldman Sachs FICC and Equities and Prime Services, data as of February 4, 2026. Past performance does not represent future returns. After each event of this level, risk managers of Pod Shop (various trading groups under multi strategy funds) will jump out and demand that everyone immediately reduce their positions without discrimination. This explains why February 5th was also a bloodbath. Considering the record breaking activity and price trend of the day (down 13.2%), we had expected to see net redemptions due to the abnormal flow of IBIT funds. Reference historical data: On January 30th, IBIT fell 5.8% the day before, recording a historical maximum redemption of -530 million US dollars; On February 4th, it redeemed -370 million US dollars in a continuous decline. According to this logic, a capital outflow of $500 million to $1 billion seems reasonable. But the opposite is true, what we see is widespread net subscriptions: IBIT added approximately 6 million shares, and AUM increased by over $230 million. Other ETFs also recorded capital inflows, totaling over $300 million and still increasing. This is quite puzzling. You can reluctantly explain that the strong rebound on February 6th reduced some outflows, but turning it into net subscriptions is completely another matter. This indicates that there are multiple factors at work simultaneously, but they do not point to a single narrative. Based on the information currently available, several hypotheses can be made: the sell-off of Bitcoin triggered a multi asset investment portfolio or strategy that is not purely crypto native (which could be the multi strategy hedge fund mentioned earlier, or the model combination under BlackRock that allocates between IBIT and IGV, triggering automatic rebalancing after intense fluctuations). The acceleration of Bitcoin sell-off is related to the options market, especially the downward direction sell-off, which did not lead to the ultimate outflow of Bitcoin assets. This means that most activities are "paper capital" operations led by market makers and traders, and these positions are generally hedged. Based on these facts, my hypothesis is as follows: the catalyst is extensive deleveraging of multi asset funds/portfolios. Because the downward correlation of risk assets has reached a statistically abnormal level. This has led to significant deleveraging, including Bitcoin, but a large amount of Bitcoin risk is actually a 'delta neutral' hedging position. For example, basis trading, relative value trading (benchmarking against encrypted stocks), etc., these trades usually offset residual delta pairs in the market maker community. Deleveraging has triggered some bearish gamma effects, forming a compound acceleration in the downward direction. Market makers need to sell IBIT, but due to the intense selling, they have to short Bitcoin without inventory. This actually creates new inventory and reduces the expected large outflow. Then on February 6th, there was a positive inflow of IBIT funds, with buyers (the specific type of buyer is still uncertain) buying on dips, further offsetting the potential small net outflow. Starting from the correlation of software stocks, I tend to believe that the catalyst comes from the selling of software stocks, as the correlation even extends to gold. Look at the following two images: [Image: GLD vs IBIT Correlation Chart (Bloomberg Terminal Screenshot)] [Image: Comparison of GLD (Gold ETF) and IBIT Price Trends] [Image: IGV vs IBIT Correlation Chart (Bloomberg Terminal Screenshot)] [Image: Comparison of IGV (Software ETF) and IBIT Price Trends] This makes sense to me. Gold is basically not an asset used by multi strategy funds for financing transactions, but it may be part of the RIA (Registered Investment Advisor) model portfolio. So this confirms that the core of the event is more likely to be a multi strategy fund. The collapse of CME basis trading brings up the second point: severe deleveraging includes hedged Bitcoin risks. Taking Pod Shops' favorite CME basis trading as an example: [Image: CME BTC basis data table (30/60/90/120 days)] Caption: CME BTC basis data from January 26 to February 6, thank you @ dlawant for providing the complete dataset - the basis has skyrocketed from 3.3% on 2/5 to 9% on 2/6 in recent months. This is one of the biggest jumps we have observed since the ETF went public, essentially confirming what happened: basis trading was forced out under orders. Think of giants like Millennium and Citadel, who were forced to close positions in basis trading (selling spot and buying futures). Considering their size in the Bitcoin ETF ecosystem, you can understand why they have been hyped up. Structured products: The downward trend of 'fuel' has reached its third leg. Since we understand the mechanism of IBIT being sold off in widespread deleveraging, what is accelerating the downward trend? One possible factor that could add fuel to the fire is structured products. Although I don't think the size of the structured product market is large enough to handle this sell-off alone, when all factors align perfectly in a way that no VaR model can predict, it is entirely possible for it to become the trigger point that triggers chain liquidation behavior. This immediately reminds me of my days working at Morgan Stanley - Knock In put barrier options can cause delta to exceed 1 in certain situations, which the Black Scholes model did not consider for regular options. [Image: Structured bill file priced by JPM in November last year] Image caption: JPM structured bills, you can see that the barrier price is around 43.6. Look at those bills priced by JPM in November last year, and the barrier price is around 43.6. If Bitcoin falls by another 10% in December, many obstacles will fall within the range of 38-39- which happens to be the center of this storm. When these barriers are overcome, if market makers use a combination of short put options to hedge Knock In risk, the gamma rate changes rapidly, especially in negative vanna (volatility sensitivity) dynamics, forcing market makers to aggressively sell underlying assets in a downturn. What we see is this: the implied volatility (IV) has collapsed to historical extreme levels, almost touching 90%, indicating a catastrophic squeeze. In this situation, market makers may have to heavily short IBIT, ultimately creating net new market share. This part requires some imagination, and it is difficult to confirm without more price difference data. But considering the record breaking transaction volume, it is entirely possible for Authorized Participants (APs) to participate. The superposition of crypto native short gamma and another factor: due to the consistently low volatility in recent weeks, clients in the crypto native circle have been buying put options. This means that cryptocurrency market makers are naturally in a bearish gamma state, essentially selling options at too low a price. When unexpected large fluctuations occur, the downward trend is further amplified. [Image: Gamma Position Distribution of Market Makers] Note: Market makers mainly hold put options in the range of 64k-71k, and their short gamma positions rebounded to 2/6 on February 6th. Bitcoin completed a heroic rebound of over 10%. An interesting phenomenon is that CME's open interest contracts (OI) are expanding much faster than Binance's. [Image: Comparison of CME vs Binance OI Changes] Caption: Thanks to @ dlawant for providing hourly snapshot data, aligning to 4pm Eastern Time, we can see a significant decrease in OI from 2/4 to 2/5 (once again verifying that CME basis trading was closed on 2/5), but it returned on 2/6, possibly to utilize higher basis levels and neutralize the outflow effect. In this way, the whole picture is pieced together: the subscription/redemption of IBIT is roughly flat, as CME basis trading has recovered net; But the price is lower because Binance's OI has collapsed, which means a lot of deleveraging comes from cryptocurrency native short gamma and liquidation. Conclusion: This is not a fundamental event, so this is my best theory of what happened on 2/5 and 2/6. It has some assumptions and is not entirely satisfactory - because there is no "culprit" like FTX to blame. But the core conclusion is that the catalyst came from non encrypted traditional financial risk mitigation operations, which happened to push Bitcoin to a level where bearish gamma accelerated the downturn through hedging activities (rather than directional trading), leading to the need for more inventory - which quickly reversed the market neutral position of traditional finance in 2/6 (but unfortunately, encrypted directional positions did not recover synchronously). Although this answer is not enough to relieve frustration, at least one thing can be confirmed: yesterday's sell-off has nothing to do with 10/10. Refuting the theory of 'Hong Kong fund yen arbitrage', I do not believe that last week's event is a continuation of the 10/10 deleveraging. Someone mentioned that a non US Hong Kong fund may have been involved in yen arbitrage trading and experienced a liquidation. There are two major loopholes in this theory: firstly, I do not believe that a non crypto prime broker can provide complex multi asset trading services at the same time, and provide a 90 day margin buffer period, which would have already caused problems before the risk control was tightened. Secondly, if financing arbitrage is used to buy IBIT options to 'recoup', then the decline in Bitcoin will not lead to an accelerated downturn - the options will only become virtual (OTM) and the Greek letters will reset to zero. This means that this transaction must involve downside risks. If you short IBIT put options while taking long USD/JPY arbitrage - then this prime broker deserves to go bankrupt. The next few days are crucial as we will see more data to determine whether investors are using this correction to create new demand, which will be a very bullish signal. At present, I am very encouraged by the prospect of ETF fund flow. I have always believed that the true buyers of RIA style ETFs (not hedge funds that focus on relative value) are diamond hands. In this regard, we have seen a significant amount of institutional advancement work, including everything that industry and Bitwise colleagues are doing. To verify this, I am focusing on net capital inflows that do not accompany the expansion of basis trading. The fragility of traditional finance is the ultimate anti fragility of Bitcoin, which also tells you that Bitcoin has now integrated into the financial capital market in a very complex way. This means that when we are positioned in the opposite direction of compression, the rise will be more vertical than ever before. The fragility of traditional financial margin rules is the anti fragility of Bitcoin. Once the reverse rally arrives - which I believe is inevitable, especially now that Nasdaq has raised the open interest limit for options - it will be very spectacular.