On February 5th, the cryptocurrency market experienced a significant downturn. Bitwise’s Chief Investment Officer, Jeff Park, attributed this sharp decline primarily to technical factors and activities within the derivatives market rather than any fundamental changes in the underlying assets.
Park emphasized that aggressive risk management strategies were at play, especially involving Bitcoin ETFs and diversified multi-asset funds. These maneuvers appeared to be central to the sell-off.
He highlighted that on that day, IBIT’s trading volume surged past $10 billion—more than twice its previous record—and options contracts reached their highest levels since inception. Notably, put options (which protect against price drops) dominated over call options (which bet on price increases), signaling heightened demand for downside protection. Additionally, IBIT’s price movements showed strong correlations with software stocks and other high-risk assets during this period, indicating that this sell-off was part of a broader market trend rather than isolated to cryptocurrencies alone.
February 4th also saw an unusually severe performance drop in multi-strategy funds. Goldman Sachs’ prime brokerage described it as an event with a z-score of 3.5—meaning such occurrences have only about a 0.05% chance statistically.
In response to such rare events, risk managers typically act swiftly by reducing positions to mitigate losses. Park interpreted the dramatic declines seen on February 5th as a continuation of these necessary risk-reduction measures.
Despite Bitcoin falling by over 13%, expected outflows from ETFs did not materialize as anticipated based on historical trends suggesting hundreds of millions would exit holdings. Instead, IBIT created roughly six million new shares during this time frame—adding more than $230 million in assets under management—and other Bitcoin ETFs collectively attracted inflows exceeding $300 million.
This unexpected pattern led Park to describe the chart behavior as “surprising,” proposing that derivative-related trading activity among dealers played a larger role in driving prices down compared with direct selling of spot assets.
The core catalyst behind these moves appears linked to widespread deleveraging across multi-asset funds: delta-neutral hedged Bitcoin positions were unwound; meanwhile short-term basis rates on CME futures spiked from around 3.3% up to nearly 9%. Large institutional players responded by simultaneously selling spot Bitcoins while purchasing futures contracts—a strategy aimed at closing out leveraged exposure safely.
The day after the plunge saw Bitcoin rebound sharply by more than ten percent on February 6th. According to Park’s observations, this recovery was supported significantly by rising open interest at CME exchanges even though Binance open positions declined substantially—reflecting renewed activity in traditional finance market-neutral strategies while crypto-specific directional bets continued being liquidated.
Park concluded that what triggered February’s sell-off wasn’t any fundamental breakdown but rather intensified risk reduction starting within multi-asset funds and spreading through derivative markets across financial systems globally.
He further dismissed theories linking this event with structural crises akin to October’s crash or attributing it solely to failures like those tied historically with Asia-based yen carry trade hedge funds due mainly technical inconsistencies present in those narratives.
This episode underscores how deeply integrated Bitcoin has become within conventional financial frameworks—a development which may introduce short-term vulnerabilities but could also set up conditions for sharper upward moves if forced buying (short squeezes) occurs later down the line.
*Please note: This content does not constitute investment advice.*