The Hidden Reason Behind the Bitcoin Crash: Failed Hedge Fund Trade
Yesterday, the Bitcoin price experienced a significant crash, dropping from over $72,000 to as low as $65,500. While there are several obvious factors contributing to this decline, such as the liquidation of long positions on the futures market and expectations of a prolonged policy by the US Federal Reserve due to high inflation data, there is also a hidden reason that has recently emerged.
Rumor of a Failed Spread Trade
According to Andrew Kang, the founder of Mechanism Capital, there is a rumor circulating that a hedge fund suffered massive losses due to a failed spread trade. The hedge fund reportedly lost over a billion dollars on the MSTR-BTC spread trade and was forced to cover its positions at the end of the day. This resulted in a sharp drop in the price of Bitcoin and an increase in the premium of MicroStrategy (MSTR) stock.
Market Transition Risks
Kang highlighted the precarious nature of market transitions, citing past failures of major players who engaged in flawed delta-neutral strategies. He mentioned notable firms like Blockfi, DCG, Genesis, Three Arrow Capital, and Alameda that have experienced losses due to risky spread trades.
MicroStrategy’s Role
MicroStrategy has been heavily involved in Bitcoin and has often attracted short sellers due to its substantial holdings. Kang noted that MicroStrategy currently has $3 billion in short interest, which accounts for approximately 20% of its float. This indicates significant interest from traditional finance boomers trying to capture the premium to net asset value (NAV).
Premium Dynamics
The premium on MicroStrategy stock has been volatile, surging from 50% before the ETF approval to 13% after the ETF launch, and peaking at 70% recently. This demonstrates the complex dynamics between MicroStrategy’s stock value and its underlying Bitcoin holdings.
The Unwinding of a Spread Trade
Renowned Bitcoin analyst Bit Paine and German crypto analyst Florian Bruce supported the narrative of a failed spread trade triggering the market movements. Bit Paine stated that the dip in Bitcoin’s price was caused by a hedge fund blowing up on their MSTR/BTC short position.
Bruce provided further details on the strategy gone wrong, explaining that the hedge fund set up a spread trade before the ETF approval, going long on BTC and shorting MSTR. The expectation was that MSTR would decline while BTC rose. However, the opposite happened, with MSTR outperforming Bitcoin. As a result, the hedge fund had to sell BTC and close their short positions on MSTR, contributing to the sharp decline in Bitcoin’s price.
The hedge fund involved in this trade is rumored to be North Rock Digital, which had expressed skepticism towards the valuation of crypto equities prior to ETF approvals. They believed that as the ETF became available, many holders would rotate their exposure into it, leading to a reversal in flow from crypto equities to spot exposure.
Hot Take: Enjoy the Dip, it Won’t Last Long
At the time of writing, Bitcoin is trading at $67,588. While there are multiple factors contributing to its recent crash, including liquidation of long positions and inflation concerns, a failed spread trade by a hedge fund appears to be another hidden reason behind this decline. Market transitions can be risky, as exemplified by past failures of major players engaged in flawed strategies.
MicroStrategy’s significant holdings in Bitcoin have attracted short sellers, resulting in high short interest. The premium dynamics of MicroStrategy stock have been volatile, indicating the complex relationship between its stock value and underlying Bitcoin holdings.
The unwinding of a spread trade by a hedge fund contributed to the decline in Bitcoin’s price, as they were forced to sell BTC and close their short positions on MSTR. However, analysts believe that this dip will not last long and encourage investors to enjoy it while it lasts.
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