"Bitcoin plunge blamed on Hong Kong hedge funds’ aggressive leveraged bets"

Bitcoin’s price plunged by nearly $15,000 in a single day, marking the worst volatility since the 2022 “FTX crisis,” with failed, highly leveraged bets by Hong Kong hedge funds increasingly being singled out as a key driver of the selloff.

According to Fortune on the 6th (local time), a growing view in the digital-asset industry is that the rout stemmed from the failure of yen carry trades and Bitcoin ETF options strategies led by Hong Kong hedge funds.

Parker White, chief operating officer (COO) of DeFi Development Corporation, wrote on X that “signs have emerged that Hong Kong hedge funds took on massive leverage in call options on BlackRock’s spot Bitcoin ETF, IBIT, and were liquidated.”

According to White’s analysis, the funds borrowed low-interest yen to finance large purchases of out-of-the-money (OTM) call options on IBIT— a high-risk wager betting Bitcoin would soon rebound during the downtrend that has persisted since October.

Out-of-the-money refers to a state in which exercising an option would not generate a profit. Because OTM options are cheaper, investors seeking short-term gains use them to capture a high leverage effect if the underlying asset moves sharply as anticipated. However, they are highly risky because the entire investment can be lost if the option does not move into the money by expiration.

White said, “But the rebound they expected never came, and to make matters worse, they ran into a funding crunch as financing costs rose due to fluctuations in the yen and were compounded by the recent sharp drop in the silver market.” He added, “The funds tried to hang on by increasing leverage to recoup losses, but were ultimately forced into liquidation. In the process, large amounts of IBIT shares were dumped onto the market, dragging down even spot Bitcoin prices.”

The U.S. Securities and Exchange Commission (SEC)’s recent move to raise position limits for Bitcoin ETF options trading is also cited as a factor that may have encouraged their speculative activity.

Hasu Qureshi, managing director at Dragonfly Capital, said, “We can’t be sure until regulators release their report, but it’s a sufficiently plausible scenario.”