Crypto prices got absolutely rocked this week with Bitcoin falling nearly $15,000 in 24 hours—a bloodbath not seen since the collapse of crypto conman Sam Bankman-Fried’s empire back in 2022. On Friday, Bitcoin had clawed back most of those losses, and is now trading around $70,000, but the episode has left even longtime crypto insiders asking each other “What just happened?!” There are plenty of theories swirling around, but one is particularly compelling: The cause of the crash lies with Hong Kong traders who placed high-leverage Bitcoin bets that went horribly wrong.

That theory was put forth on X by Parker White, a former equities trader who is now COO at a crypto firm called DeFi Development Corporation. In a long thread, White said there is evidence pointing to the sudden implosion of Hong Kong hedge funds that held call options in BlackRock’s IBIT, which is the world’s biggest Bitcoin ETF.

White suggests that the hedge funds used the Yen carry trade (a form of interest arbitrage) to finance big positions in out-of-the-money IBIT options. This amounted to a risky bet that Bitcoin prices, which have been slumping since a big sell-off in October, would recover. The hoped-for rally didn’t arrive, however. Meanwhile, White speculates that the Hong Kong funds also got pummeled by headwinds in the Yen-carry trade—which made their financing more expensive—and exposure to recent convulsions in the silver market.

The upshot is the hedge funds faced a perfect storm and, as the crypto market slumped further this week, the value of their holdings declined until they got liquidated—forcing the mass sell-off of IBIT shares and a calamitous fall for Bitcoin. Here is how White explained what happened in trader-speak:

*Now, I could easily see how the fund(s) could have been running a levered options trade on IBIT (think way OTM calls = ultra high gamma) with borrowed capital in JPY. Oct 10th could very well have blown a hole in their balance sheet, that they tried to win back by adding leverage waiting for the “obvious” rebound. As that led to increased losses, coupled with increased funding costs in JPY, I could see how the fund(s) would have gotten more desperate and hopped on the Silver trade. When that blew up, things got dire and this last push in BTC finished them off.*

In his post, White also pointed out that the Hong Kong hedge funds, whose Bitcoin trading occurred only in the form of ETF shares, are not part of the traditional crypto ecosystem. This means that chatter about their predicament did not bubble up on “Crypto Twitter”—which is the go-to forum for industry news—and nor did it create counter-parties who incurred big losses, and would be likely to warn others.

White’s theory is just that, of course: no more than a theory. Meanwhile, history shows that major Bitcoin crashes have typically been touched off by multiple factors, not a single event. And indeed, this week’s crypto crackup coincided with a broader AI-related asset sell-off, uncertainty over the fate of a key blockchain bill, as well as crypto names appearing in the Epstein files—factors that all likely contributed to Thursday’s meltdown.

Still, White’s explanation is the most persuasive, and is further supported by other circumstantial evidence, including a recent decision by the Securities and Exchange Commission to lift limits on trading Bitcoin options.

Meanwhile, other longtime crypto figures expressed cautious support for the Hong Kong hedge fund theory. That included the respected venture capitalist Haseeb Qureshi who described the theory as plausible, but added that it may take months to wait for regulatory filings that could help confirm it, and that in some cases a key crypto player can “blow up” without anyone ever learning their identity. But for those who are confident that a hedge fund is at the root of this week’s market troubles, there is already a Polymarket forum to bet on the culprit.

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

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