The price of bitcoin has plummeted from over $72,000 yesterday to as low as $65,500. As reported today, there are several obvious reasons for this, such as the liquidation of large long positions in the red-hot futures market, expectations of a “higher for longer” policy by the US Federal Reserve .US as a result of a hotter than expected situation. inflation data and a relatively weak entry day for spot ETFs yesterday.
Did this trigger the crash of bitcoin?
However, there is also a rumor that reveals another hidden reason for the collapse: a failed spread trade by a hedge fund that resulted in losses of more than $1 billion. Andrew Kang, founder of Mechanism Capital, revealed in X the intricate details of this debacle.
“Apparently a fund wasted over $1 billion trading MSTR-btc spread today. They covered until the close, which is why btc unraveled and the MSTR premium rose to highs. PNL bagged Saylor on base and will be returned to btc.”
Kang had previously clarified the precarious nature of market transitions, citing the downfall of several major players due to flawed delta-neutral strategies. “There are some really strange things that happen in market trend transitions. Like large delta-neutral funds/institutions getting destroyed in ‘risk-free’ spread trading,” Kang commented, pointing to past failures of notable companies such as Blockfi, DCG, Genesis, Three Arrow Capital and Alameda.
MicroStrategy, under the leadership of Michael Saylor, has notably been a leveraged play on bitcoin, and its substantial holdings often generate significant interest from short sellers. According to Kang, “MSTR currently has $3 billion in short-term interest, approximately 20% of its float. I imagine much of that float is due to angry trading boomers trying to capture the premium over net asset value.”
The discrepancy in premiums that Kang refers to (which increased from 50% before the ETF to 13% after the ETF, and recently peaked at 70%) illustrates the volatile dynamics at play between value stocks of MicroStrategy and its underlying bitcoin holdings.
The trade went wrong
Renowned bitcoin analyst Bit Paine and German crypto analyst Florian Bruce corroborated the narrative, pointing to the outcome of a major spread trade as a catalyst for market movements. “That drop was due to a fund exploding on its MSTR/btc short,” Bit Paine commented.
Bruce provided a clear exposition of the strategy gone wrong: “A hedge fund established a spread trade shortly before the approval of the ETF: Long btc and Short MSTR. The idea behind this was that MSTR will fall through the ETF while btc rises.” This explanation exposes the hedge fund's miscalculation, as the actual market response caused MSTR to outperform bitcoin, requiring a rapid liquidation of positions that contributed to the sharp drop in bitcoin price.
“btc was sold and short positions in MSTR were closed (MSTR was bought). This is probably also why MSTR just had a small mini rally and is doing less poorly than other btc ETFs. Enjoy the dip. “I don’t think it will last long,” Bruce said.
The alleged hedge fund in question, North Rock Digital, had previously outlined its contrarian strategy on
“The opposite idea (…) was to sell short cryptocurrencies against long spot cryptocurrencies. In our view, as we approach the ETF, crypto stocks have been used as substitutes for spot exposure (…) once the ETF is available, we expect this flow to reverse as many of these holders They rotate exposure to the ETF. Given the dislocated nature of many of these names (MSTR, MARA and COIN are our three favorite shorts), we believe there are several attractive shorts to pair with long spot exposure,” North Rock Digital said in January.
At the time of this publication, btc was trading at $67,588.
Featured image created with DALL·E, chart from TradingView.com
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