On February 5, the crypto market suffered a brutal flash crash: Bitcoin briefly plunged to $60,000 with over $2.6 billion in 24-hour liquidations. Bitwise CIO Jeff Park offers a detailed framework from options and hedging perspectives, arguing the sell-off was likely triggered by broad deleveraging among multi-strategy funds during one of the most volatile trading days in recent history.
Record Volumes and Options Activity
IBIT saw its highest-ever trading volume, with options volume also hitting a record. The structure of options activity was unusual, concentrated on specific directions. Goldman Sachs' prime brokerage team reported that Feb 4 was one of the worst single days for multi-strategy funds, with a Z-score of 3.5 (a 0.05% probability event, 10 times rarer than a classic 3-sigma black swan). Such extreme events typically force massive deleveraging, explaining why Feb 5 turned into a bloodbath.
Despite Bitcoin dropping 13.2% on Feb 5, IBIT did not see the expected $500 million to $1 billion in net redemptions. In fact, it later flipped to net inflows, puzzling many. Park suggests this indicates the selling was driven by paper-based exposure (futures, options) rather than a real outflow of Bitcoin assets.
Three Key Assumptions
Park sets out three premises: First, the sell-off likely came from multi-strat hedgies or model portfolio rebalancing. Second, the acceleration was linked to options market structures, especially downside positions. Third, the absence of asset outflows points to paper-driven selling.
Core Mechanism: Deleveraging + Negative Gamma
The catalyst was a broad deleveraging triggered by an abnormal correlation among risk assets. This involved Bitcoin exposure, much of it delta-neutral (basis trades, relative value). The deleveraging sparked a negative gamma effect, forcing dealers to sell IBIT as hedges. Because the selling was so violent, market makers net-shorted Bitcoin regardless of inventory, creating new ETF shares and reducing expected outflows.
CME Bitcoin basis widened from 3.3% to 9% on Feb 5, the largest jump since ETF launch, confirming massive forced liquidation of basis trades (sell spot, buy futures) by institutions like Millennium and Citadel.
Structured Products and Knock-In Barriers
Park recalls his Morgan Stanley days, noting structured products with knock-in put barriers can cause delta changes exceeding 1. Using a JPMorgan note from last November with a knock-in barrier at 43.6 as example, he explains how hitting such barriers forces dealers to sell more underlying, crashing implied volatility to ~90% — a disaster-level squeeze. Meanwhile, low volatility environment had left crypto dealers naturally short gamma from customer put buying, amplifying the move.
On Feb 6, Bitcoin bounced over 10%. CME open interest expanded faster than Binance, suggesting some basis trades were re-established to capture elevated yields, offsetting outflows.
Conclusion: The 'Cleanest Deleveraging'
Park concludes that while no single villain exists (like FTX), the Feb 5 sell-off was likely one of the cleanest deleveragings ever. He refutes theories about a Hong Kong-based fund's yen carry trade blow-up, citing logical flaws. The key takeaway: Bitcoin has fully integrated into global capital markets in a complex, mature way. The fragility of traditional margin rules is Bitcoin's anti-fragility.