The Bitcoin price fell yesterday from over $72,000 to $65,500. As reported earlier today, there are several obvious reasons for this, including the liquidation of sizeable long positions in the red-hot futures market, expectations of a ‘higher for longer’ policy from the US Federal Reserve due to warmer than expected inflation data and a relatively weak inflow day for spot ETFs yesterday.
Did this cause the Bitcoin crash?
However, there is also a rumor that reveals yet another hidden reason for the crash: a failed spread trade by a hedge fund that resulted in losses of more than a billion dollars. Andrew Kang, the founder of Mechanism Capital, revealed on X the intricate details of this debacle.
“Apparently a fund spent $1 billion+ on the MSTR-BTC spread trade today. They got to the end, that’s why BTC dumped and MSTR premium went to the highs. PNL is being pocketed by incumbent Saylor and will be put back into BTC.”
Kang had previously explained the precarious nature of market transitions, citing the demise of several major players due to flawed delta-neutral strategies. “You get some really crazy things happening at market trend transitions. As if large delta-neutral funds/institutions are going bankrupt with ‘risk-free’ spread trades,” Kang noted, pointing to past failures of well-known firms such as Blockfi, DCG, Genesis, Three Arrow Capital and Alameda.
MicroStrategy, led by Michael Saylor, has been particularly leveraged on Bitcoin, with its significant holdings often driving significant interest from short sellers. According to Kang, “MSTR currently has $3 billion in short interest – about 20% of its float. I imagine a large part of that audience consists of angry trad boomers trying to capture the premium on NAV.”
The premium differential Kang refers to – up from 50% pre-ETF to 13% post-ETF, and recently peaking at 70% – illustrates the volatile dynamics at play between MicroStrategy’s stock value and its underlying Bitcoin holdings.
Trade has gone wrong
Renowned Bitcoin analyst Bit Paine and German crypto analyst Florian Bruce confirmed the story, pointing to the expiration of a significant spread trade as the catalyst for the market moves. “That dip was because a fund blew up its MSTR/BTC short,” Bit Paine said noticed.
Bruce as long as a clear explanation of the failed strategy: “A hedge fund set up a spread trade shortly before the approval of the ETF: Long BTC & Short MSTR. The idea behind it was that MSTR will fall through the ETF while BTC rises.” This statement exposes the hedge fund’s miscalculation, as the actual market reaction indicated that MSTR outperformed Bitcoin, necessitating a quick unwind of the positions that contributed to Bitcoin’s sharp price decline.
“BTC was sold and the shorts on MSTR were closed (MSTR bought). This is probably also why MSTR just had a small mini-rally and is not doing as badly as other BTC ETFs. Enjoy the dive. I don’t think it will last long,” said Bruce.
The alleged hedge fund in question, North Rock Digital, had previously outlined its contrarian strategy towards X and expressed skepticism about the valuation of crypto stocks ahead of ETF approvals.
“The contrarian idea […] was to short crypto stocks versus long spot crypto. In our view, as we approach the ETF, crypto stocks are being used as a proxy for spot exposure […] Once the ETF becomes available, we expect this flow to reverse as many of these holders will rotate their exposure to the ETF. Given the disruptive nature of many of these names (MSTR, MARA and COIN are our three favorite shorts), we believe there are several attractive shorts that can be paired with long spot exposure,” North Rock Digital said in January.
At the time of writing, BTC was trading at $67,588.
Featured image created with DALL·E, chart from TradingView.com
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