What caused the massive Bitcoin crash? Clues point to a blow-up at Hong Kong hedge funds

Core Insights - The recent crash in cryptocurrency prices, particularly Bitcoin, saw a drop of nearly $15,000 in just 24 hours, reminiscent of the collapse following Sam Bankman-Fried's empire in 2022 [1] - Bitcoin has since recovered to around $70,000, but the incident has raised questions among crypto insiders about the underlying causes [1] Group 1: Causes of the Crash - A theory suggests that the crash was driven by Hong Kong traders who made high-leverage bets on Bitcoin that backfired [1] - Evidence points to the sudden failure of Hong Kong hedge funds that held call options in BlackRock's IBIT, the largest Bitcoin ETF [2] - The hedge funds utilized the Yen carry trade to finance substantial positions in out-of-the-money IBIT options, betting on a recovery in Bitcoin prices that did not materialize [3] Group 2: Impact on Hedge Funds - The hedge funds faced a "perfect storm" as the crypto market continued to decline, leading to a liquidation of their holdings and a mass sell-off of IBIT shares, which contributed to Bitcoin's price drop [4] - The funds' strategy involved running a leveraged options trade on IBIT, which became increasingly risky as losses mounted and financing costs in JPY rose [4] Group 3: Market Dynamics - The Hong Kong hedge funds traded Bitcoin exclusively through ETF shares, distancing them from the traditional crypto ecosystem, which limited the spread of information regarding their predicament on platforms like "Crypto Twitter" [5] - This lack of communication meant that there were no significant counter-parties to warn others about the potential risks involved [5]