Bitcoin price has dropped from $72,000 to $65,500 yesterday. As reported earlier today, there are a number of obvious reasons for this, such as the liquidation of extensive long positions on red-hot futures markets, as expectations for a “high for a long time” policy from the US Federal Reserve warmed more than expected. Inflation data and relatively weak flow day for spot ETFs yesterday.
Did this trigger the bitcoin crash?
However, there is also a rumor that reveals another hidden cause of the crash: a failed spread trade by a hedge fund that resulted in a billion dollar loss. Andrew Kang, Founder of Mechanism Capital, revealed The intricate details of this debacle on X.
“Apparently one fund blew $1b+ on the MSTR-BTC spread trade today. It closed causing BTC to dump and the MSTR premium to go higher. A PNL based sailor will pocket and be put back into BTC.
Kang had previously explained the uncertain nature of the market’s transition, citing the collapse of several major players due to flawed delta-neutral strategies. “You get some really amazing things that happen in market trend transitions. As large delta-neutral funds/institutions splurged on ‘risk-free’ spread trades,” commented Kang, pointing to the past failures of notable firms such as Blockfy, DCG, Genesis, Three Arrow Capital and Alameda.
MicroStrategy, led by Michael Siler, is a particularly leveraged play on Bitcoin, whose large holdings often generate significant interest from short sellers. According to Kang, “MSTR currently has $3b in short interest – approximately 20% of its float. I imagine a lot of that float is tradeoff boomers trying to get a premium over NAV.”
The premium discrepancy Kang refers to — rising from 50% pre-ETF to 13% post-ETF and recently reaching 70% — explains the volatile dynamics between MicroStrategy’s stock value and its underlying bitcoin holdings.
A trade gone wrong
Renowned Bitcoin analyst Bit Penn and German crypto analyst Florian Bruss corroborated the narrative, pointing to a significant spread trade closure as the catalyst for the market’s move. “This drop meant the fund flew into their MSTR/BTC short,” Bitpen said commented.
Bruce provided A clear demonstration of the strategy gone wrong: “Hedge fund sets up spread trade shortly before ETF approval: long BTC and short MSTR. The idea behind it was that if the MSTR ETF fell, BTC would rise.” This explanation exposes the hedge fund’s miscalculation, as the actual market response outperformed MSTR Bitcoin, necessitating the rapid exit of positions that contributed to Bitcoin’s sharp price decline.
“BTC was sold and shorts on MSTR were closed (MSTR bought). Perhaps this is also the reason why MSTR has recently staged a short rally and is doing less badly than other BTC ETFs. Enjoy the dip. I don’t think it will last long,” Bruce said.
The purported hedge fund in question, North Rock Digital, previously outlined its contrarian strategy on X, which cast doubt on the crypto equity’s valuation in the lead-up to ETF approvals.
“Opposite ideas […] Short was crypto equity versus long spot crypto. In our view, as we move to ETFs, crypto equities are being used as a proxy for spot exposure. […] Once ETFs become available we expect this flow to reverse as many of these holders rotate exposure to ETFs. Given the disruptive nature of many of these names (MSTR, MARA and COIN are our three favorite shorts), we believe there are many attractive shorts to pair against long spot exposure,” North Rock Digital said in January.
At press time, BTC traded at $67,588.
Featured image created with DALL·E, charts on TradingView.com
Disclaimer: The article is provided for educational purposes only. It does not represent NewsBTC’s views on whether to buy, sell or hold any investment, and investments inherently involve risk. You are advised to do your own research before making any investment decisions. Use the information provided on this website entirely at your own risk.