Bitwise advisor Jeff Park attributed the February 5 crypto selloff to multi-asset portfolio deleveraging rather than crypto-specific factors.
Summary
- February 5 selling was driven by multi-asset fund deleveraging, not crypto-native fear.
- CME basis trades unwound violently as pod shops de-grossed across portfolios.
- Short gamma and structured product hedging amplified downside despite ETF inflows.
IBIT recorded 10 billion in trading volume, doubling its previous high, while options activity hit historic levels led by put contracts rather than calls.
The crash saw Bitcoin (BTC) fall 13.2% yet IBIT posted $230 million in net creations with 6 million new shares, bringing total ETF inflows above $300 million.
Goldman Sachs’ prime brokerage desk reported February 4 was one of the worst daily performances for multi-strategy funds with a z-score of 3.5. This was a 0.05% probability event 10 times rarer than a three-sigma occurrence.
Park wrote that risk managers at pod shops forced indiscriminate de-grossing, explaining why February 5 turned into a bloodbath.
CME basis trade unwinding drove violent deleveraging
Park identified the CME basis trade as a primary driver of selling pressure. The near-dated basis jumped from 3.3% on February 5 to 9% on February 6, one of the largest moves observed since ETF launch.
Multi-strategy funds like Millennium and Citadel hold large positions in the Bitcoin ETF complex and were forced to unwind basis trades by selling spot while buying futures.
IBIT showed tight correlation with software equities rather than gold over recent weeks. Gold is not typically held by multi-strategy funds as part of funding trades, confirming that drama centered on these funds rather than retail investment advisors.
The catalyst originated from software equity selloffs rather than crypto-native selling.
Structured products created crypto bloodbath
Structured products with knock-in barrier features contributed to selling acceleration. A JPMorgan note priced in November carried a barrier at $43,600.
Notes priced in December when Bitcoin dropped 10% would have barriers in the $38,000-$39,000 range.
Put buying behavior in crypto-native markets over preceding weeks meant crypto dealers held naturally short gamma positions.
Options were sold too cheaply relative to outsized moves that eventually materialized, worsening the downside. Dealers held short gamma on puts from the $64,000-$71,000 range.
February 6 recovery saw CME open interest expand faster than Binance. The basis trade partially recovered, offsetting outflow effects while Binance open interest collapsed.
Park concluded that tradfi derisking was the catalyst that pushed Bitcoin to levels where short gamma hedging ramped up declines through non-directional activity requiring additional inventory.