Recently, I revisited an interesting market event and want to discuss the true logic behind last February’s Bitcoin plunge. During that day, liquidation volumes exceeded $2.6 billion, and the price briefly crashed to $60k, but the market has not reached a consensus on the cause of this sharp decline. I discovered a perspective worth deep exploration—understanding Bitcoin’s drop through options and hedging mechanisms.

The most peculiar aspect that day was the data contrast. IBIT trading volume hit a record high, exceeding $10 billion, twice the previous record. But more critically, the volume structure was completely abnormal—put options dominated the entire trading, rather than the usual call options. At the same time, I observed that IBIT showed an extremely tight correlation with software stocks and other risk assets, even surpassing its correlation with gold. What signals might this reveal?

Goldman Sachs’s prime brokerage team issued a report at the time indicating that it was one of the worst single days ever for multi-strategy funds, with a Z-score of 3.5, representing an extreme event with only a 0.05% probability. Typically, in such situations, risk managers at multi-strategy funds would intervene swiftly, demanding all trading teams to immediately de-leverage indiscriminately. This explains why the following day also turned into a bloodbath.

Interestingly, according to historical patterns, such market conditions should have led to large ETF redemptions. Referring to previous data, after IBIT fell 5.8% on January 30, a record $530 million was redeemed, and around $370 million was redeemed on February 4. Logically, on February 5, we should have seen at least $60k to $1 billion in outflows. But in reality, the opposite happened—broad net buying. IBIT added about 6 million shares that day, bringing in over $230 million in assets under management growth, and the entire Bitcoin ETF system attracted more than $300 million in net inflows.

This result is truly perplexing. Theoretically, one could argue that the subsequent strong rebound reduced redemption pressure, but turning a “possible reduction in outflows” into “net inflows” is a whole different matter. This suggests that multiple factors were likely at play simultaneously. Based on current information, I see several key clues.

First, this round of selling probably touched on a type of multi-asset portfolio that is not purely crypto-native. This could be multi-strategy hedge funds or similar institutional allocations between IBIT and software ETFs, forced to rebalance automatically during extreme volatility. Second, the acceleration of the sell-off is closely related to the options market, especially put options structures associated with downward moves. Third, this sell-off did not ultimately translate into capital outflows from Bitcoin assets, implying that the main driving force was “paper capital systems,” i.e., positions led by traders and market makers, mostly in hedged states, adjusting their overall exposure.

The direct catalyst for Bitcoin’s plunge was likely a broad deleveraging triggered after multi-asset funds’ risk asset correlations reached an abnormal statistical level. This process then triggered an extremely fierce deleveraging, including Bitcoin’s risk exposure, but a significant portion of the risk was actually in hedged positions, such as basis trades and relative value trades. This deleveraging then caused a gamma squeeze, further amplifying downward pressure, forcing traders to sell IBIT. But because the sell-off was so intense, market makers had to short Bitcoin net, regardless of their inventory, which in turn created new ETF holdings, reducing expectations of large-scale capital outflows.

From the complete data from January 26 to that day, the CME Bitcoin basis curve clearly reflected this. The basis for 30, 60, 90, and 120 days jumped from 3.3% to as high as 9% on February 5. This was one of the largest jumps since the ETF launched, almost definitively indicating that basis trades were massively forced to close out positions (selling spot, buying futures). Considering the scale of top quantitative firms forced to unwind basis trades, it’s easy to see why this operation caused a severe impact on the overall market structure.

Another factor not to be overlooked is structured products. While I don’t believe the size of structured products alone could trigger this sell-off, when all factors align abnormally and perfectly beyond any risk model’s expectations, they can become acute triggers for chain liquidations. Some structured products with knock-in put barriers can cause highly destructive outcomes. When these barriers are breached, if traders hedge risk by selling puts, then under negative Vanna dynamics, the speed of Gamma changes can be extremely rapid. At this point, the only feasible response for traders is to aggressively sell the underlying asset during market weakness. This is exactly what we observed: implied volatility collapsed to near 90%, approaching catastrophic compression levels.

Because overall volatility had been low previously, crypto market clients had been generally buying puts in recent weeks. This meant traders were naturally in a short Gamma position and underestimated the potential for extreme volatility. When a large move finally occurred, this structural imbalance further amplified downward pressure.

By February 6, Bitcoin rebounded more than 10%. Notably, CME open interest expanded at a much faster rate than the spot market. From February 4 to 5, CME open interest sharply collapsed, confirming that basis trades were massively unwound on February 5; then, on February 6, these positions were likely re-established to take advantage of higher basis levels, offsetting the outflows.

The entire logical chain thus re-closed: IBIT was roughly balanced in subscriptions and redemptions because CME basis trades had recovered; but prices remained low because open interest in the spot market had sharply collapsed, indicating that a significant part of the deleveraging pressure came from short Gamma positions and forced liquidations in the crypto-native market.

This is the best explanation I have for the cause of Bitcoin’s sharp decline and subsequent market behavior. The reasoning is based on several assumptions and is not entirely satisfying, as there is no single “culprit” to point to. But the core conclusion is: the trigger for this sell-off originated from traditional financial risk-off behavior, and this process just happened to push Bitcoin into a zone where short Gamma hedging accelerates downward movements. This decline was not driven by directional bearishness but by hedging needs, which then rapidly reversed.

Although this conclusion may not be particularly exciting, at least it’s somewhat reassuring that this crash likely has nothing to do with other extreme risk events. The coming days will be critical, as more data will reveal whether investors are using this decline to establish new demand. If so, that would be a very bullish signal.

All of this again demonstrates that Bitcoin has integrated into the global financial capital markets in an extremely complex and mature way. When the market later moves in the opposite direction, upward trends could be even steeper than ever before. The fragility of traditional margin rules is precisely Bitcoin’s antifragility. Once prices rebound, it will be a spectacular rally.