Bitcoin Price Plunges: A Hidden Reason Behind the Crash?
The Bitcoin price has experienced a significant drop, falling from over $72,000 to as low as $65,500. While there are several obvious factors contributing to this crash, such as the liquidation of long positions on the futures market and expectations of a “higher for longer” policy by the US Federal Reserve, there is also a hidden reason that has emerged.
A Failed Spread Trade
Rumors suggest that a hedge fund’s failed spread trade played a role in the Bitcoin crash. Andrew Kang, founder of Mechanism Capital, revealed the details of this debacle on Twitter. According to Kang, a fund lost over a billion dollars on the MSTR-BTC spread trade. They covered their positions at the end of the day, leading to a drop in BTC price and an increase in MicroStrategy’s premium.
Precarious Market Transitions
Kang highlighted the precarious nature of market transitions and referenced previous failures of major players due to flawed delta-neutral strategies. He mentioned notable firms like Blockfi, DCG, Genesis, Three Arrow Capital, and Alameda that have experienced similar issues.
MicroStrategy’s Influence
MicroStrategy has been heavily invested in Bitcoin, making it a leveraged play on the cryptocurrency. This has attracted significant interest from short sellers. Kang noted that MicroStrategy currently has $3 billion of short interest, accounting for approximately 20% of its float.
Premium Discrepancy
The premium discrepancy between MicroStrategy’s stock value and its underlying Bitcoin holdings has been volatile. Before the ETF approval, the premium was at 50%. It dropped to 13% post-ETF and recently peaked at 70%. This dynamic relationship between MicroStrategy and Bitcoin has contributed to market movements.
Unraveling the Trade Gone Wrong
Bitcoin analysts Bit Paine and Florian Bruce supported the narrative of a significant spread trade unwinding as the catalyst for the market crash. Bit Paine stated that the dip was caused by a fund blowing up on their MSTR/BTC short. Bruce provided a clear explanation of the strategy’s failure, highlighting how a hedge fund set up a spread trade with the expectation that MSTR would fall while BTC rose.
However, the market response saw MSTR outperform Bitcoin, leading to the unwinding of positions. BTC was sold, and shorts on MSTR were closed, causing Bitcoin’s sharp price decline. Bruce suggested that this might be why MSTR had a small rally and performed better than other BTC ETFs.
The Contrarian Strategy
The hedge fund involved in this failed trade, North Rock Digital, had previously outlined its contrarian strategy. They expressed skepticism towards the valuation of crypto equities leading up to ETF approvals and believed that shorting crypto equities while going long on spot crypto would be profitable.
North Rock Digital stated that once the ETF became available, they expected holders of crypto equities to rotate their exposure into the ETF, reversing the flow. They identified several attractive shorts to pair against long spot exposure, including MSTR, MARA, and COIN.
Hot Take: Will The Dip Last?
At press time, BTC is trading at $67,588. While the Bitcoin crash has been attributed to various factors like futures market liquidation and inflation concerns, it seems that a failed spread trade by a hedge fund also played a role. As with any market transition, unexpected events can lead to significant losses for traders and investors.
It remains to be seen how long this dip will last, but some analysts believe it may not be a prolonged downturn. As the market continues to evolve and new strategies are tested, it’s important for crypto enthusiasts to stay informed and adapt to changing market dynamics.
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