Transcription
Bitcoin's crash off its all-time high and then its sudden crash last week. It left many people stunned. And it took a couple days, but now we have the data to see exactly what happened and why.
Now, everyone's had a theory, right? Some say it was a Hong Kong fund, uh, a carry trade, a well liquidation. Well, I dug through the ETF flows, the options data, the CMA basis trades, and there was no single culprit. And that's the part that matters because this wasn't a one-time event. It's baked into how Bitcoin now trades inside the financial system and it cuts both ways.
So, in this video, I'm going to break down the three mechanics that cause this and how to position yourself before they move price in the other direction. And if you want to understand the system, not just react to it, make sure to subscribe to this channel right now so you can keep up as I discuss this more. And let's go.
All right, let's jump into it. We got a lot to cover today. We're going to go a little bit deep, but I'm going to try to keep it very easy to understand. But let's just start talk start off by talking about what happened last week. It was uh February 5th at the time of this recording. Um so last week Bitcoin's price had been coming down but then it crashed in a single day and it was so severe that Goldman Sachs called it a 3.5 sigma event. Now what does that mean? It basically means it's like a statistically like 0.05% uh chance of happening probability. So basically it means like it doesn't happen. And again this was after Bitcoin had already been sliding for about four months, right? right? And then it had that big crash. And so whenever that happens, we see this this big move, everybody wants to find out why. Now, there's not always a reason why, but it's important to understand why so that we can learn to avoid it next time or or benefit it from if we can. And we want to understand it. Why did it go lower? You know, also, is it dead, right? Is it is it going to go back up and so forth. So, let's take a look.
Now, the first thing we want to do is we want to look at the trading volume. We want to see the numbers. And uh when you look at them, they're completely wild. First of all, Black Rockck's Bitcoin ETF, which is IBIT, it did over $10 billion in trading volume in a single day. Now, is that a lot? Well, it's double the previous record. Double that. The options activity also hit an all-time high. But here's the weird part. It was led by puts. What does that mean? Well, basically, the betting was almost all to the downside. But here's where it gets really strange, right? After a day like that, everyone got out. you'd expect money would be running for the exits, right? Like you're probably watching this because you're scared and you want to know if it can keep crashing. So for comparison, just 6 days earlier, IBIT was down 5.8%. And yet we saw $530 million in redemptions leaving for the exits. But after this 13% crash, you'd expect probably at least 500 million, maybe a billion dollars running for the door. But the opposite happened. IBIT saw 6 million new shares created, 230 million in new assets. The rest of the Bitcoin ETF complex, they were also positive. There was over 300 million in net inflows. So, we had record selling, we had record volume, and we had money flowing in. Something about this doesn't quite add up. And so, of course, that's the thread that we need to pull on. We need to dig into.
Now, before I keep going, I do want to say that um I got a lot of this information from Jeff Park, who wrote an article on this, and also from Samson Mau, who wrote a big Twitter thread on this. I'm going to link to both of their um inspirational posts down below so you can read those. A lot more information on this if you want to go down into those rabbit holes and pull those weeds. But let's go and dig into this thread here, the thread that we need to pull.
Now, like I said, whenever something like this happens, everybody's looking for the culprit, right? They want a villain. Like, whose fault was it? And again, that's important, right? We want to learn how to read the markets. We want to learn how to protect ourselves. And more importantly, we want to learn how to take advantage of these moves. And so some of the biggest moves that we see, some of the biggest theories going around are, like I said earlier, like a a fund in Hong Kong collapsed, right? They got caught in like a yen carry trade um and then it just cascaded down into Bitcoin. And that's a good story. It's a clean story. I get the appeal, but it's got a lot of holes. Like, so first of all, the the kind of prime brokerage that would service that level of complex trading, that would have probably tightened up the risk controls long before it got to this point. Now, with that size, with that sophistication, like these aren't amateurs that were doing this. Um, second, if the theory is they used IBIT options to trade out of the hole, then a Bitcoin decline doesn't accelerate anything, right? The options would just die. They would expire worthless. The only way you get this insane downside acceleration is if they were short puts. And no one's really shorting Bitcoin puts to fund a yen carry trade at not at this size at all. So, the single entity theory doesn't really work out for us.
Which brings us to a much more interesting and I think a much more important possibility. What if there was no single culprit at all? Now, here's something that most people get wrong about markets, right? They think prices move because of news. Some headline drops, people react, right? The market moves. But that's not how it actually works. Price moves because of positioning, right? Where the money is sitting, how it's hedged, and what happens when it's forced to move. Now once Bitcoin entered the ETF world, it stopped trading like this isolated crypto asset. It started trading like a risk component inside institutional portfolios. Now today, it's sitting right next to software stocks. It's sitting next to other risk assets in the same books governed by the same risk managers subject to the same margin rules. So if you understand that one single idea, everything that follows from here on out, it's going to make sense.
Now, once you see how these three mechanics connect, you're going to understand why this crash actually sets up the next move, not delayed it. All right, so here's what I think actually went down, and it comes down to three things that stacked on top of each other like dominoes. I'm going to break all three down separately so it's easy to understand again.
So, first we have the trigger, right? And here's a simple version. Like, Bitcoin didn't crash because of Bitcoin. It crashed because it was sitting in the same portfolio as everything else that was crashing at the same time. Risk managers told everyone to just sell everything. Let me show you why I believe that. Just take a look at these two charts right here. Bitcoin's correlation with software equities over the past few weeks has been almost in lock step. Now, also look at this chart, the Bitcoin versus gold chart. You can see it's much weaker. Now, why does that matter? Because gold doesn't sit inside multistrategy hedge fund portfolios. it's not part of their funding trades, but software stocks are. And now through the ETFs, Bitcoin is in the same books right next to them. It's sort of like um imagine you've got like a filing cabinet and you've got all your important documents. They're all organized perfectly right inside that file cabinet, but then somebody walks by and they pull the whole cabinet off the wall. Well, everything falls out. Not because of in any of the individual documents that were in there, right? that wasn't the problem, but because they were all in the same file cabinet, they got ripped off the wall, right? That's what happened, right? Goldman tells us this was catastrophic. Risk managers at places like Millennium and Citadel, they stepped in and said, basically, cut everything. Right? It doesn't matter what it is. If it's in the book, just sell it. And and Bitcoin was in the book, right? So that's the trigger and it explains why the selling started but it doesn't explain why it got so violent, why it continued to go down 13% in a single day, right? This isn't something normal. Something amplified this.
Okay, so the second thing that we want to look at is the accelerant. Now, here's a simple version of that. There's popular trades on Wall Street where big funds buy the Bitcoin ETF and then they short the future to capture the spread. Now, when those trades get forcibly unwound, it creates this massive selling pressure, and there's nobody on the other side of that. Now, on top of that, banks have been selling financial products tied to Bitcoin's price with built-in tripwire. When the price crosses certain levels, the math forces dealers to sell even more into the falling market, and then, of course, selling causes more selling, and it creates this feedback loop. Now, let me show you exactly what that looked like. You can see the CME basis trade is the classic example, right? You can buy spot Bitcoin through the ETF. You can short CMA futures and you can pocket the spread, right? You're not betting on direction. You're just trying to capture the gap there. But when the risk manager says degross everything, even those hedged positions, they have to unwind. I mean, look at this. The near dated basis jumped from 3.3% to 9% in a single day. That's one of the biggest moves we've seen since the ETF launched. But that's the basis trade being forcibly unwound when funds like Millennium and Citadel, right? They're they're massive players in the Bitcoin ETF complex when they get the call from risk management. This is what it looks like.
Right now, here's where it cascades. Now, on top of all this, you've got structured products, things like knock-in footnotes that banks like JP Morgan have been pricing. Uh it's sort of like maybe call it a trip wire, right? As long as the price stays above a certain level, everything's fine. But when it crosses that barrier, then the dealer's hedging math, it completely changes. They suddenly have to sell. They have to sell aggressively into the falling market, right? And they do that just to stay hedged. All that selling, it pushes the price down further, which triggers, of course, more selling. Now, to make it even worse, crypto dealers had also been selling options way too cheaply for weeks because the volatility had been so low. So, basically, everybody was sitting on the wrong side of this at the same time. So when the move hit, the whole system was pushing in one direction. It's sort of like imagine like a revolving door that everyone tries to exit at the same time, right? The door doesn't speed up. It it just jams and then it spins out of control.
Now, if we want to understand this, we can just look at the evidence, right? Here's the part that really ties this whole thing together. And this is the data point that nobody seems to be talking about. The simple version is the selling was so violent that the market makers ended up selling shares they didn't actually have. That created new units in the system and then real buyers had to come in the next day and buy the dip. Right? That's why the ETF showed net inflows on a 13% down day. It wasn't people buying through the crash. It was the plumbing breaking and then getting repaired. Let me show you what I'm talking about. After all that, the record volume, the 13% crash, the basis trade unwind, the gamma squeeze, the ETF saw net inflows, new shares were created. But how is that possible? Because the selling was so fast, the market makers had to short IBIT beyond their own inventory that they had. So, when you're a dealer trying to hedge a move this violent, you end up selling shares that you don't technically have. Now, that mechanically creates new units. It's not bullish buying during the crash. It's a byproduct of the chaos itself. Then we saw on February 6, Bitcoin bounced 10%. Now, if you look at this chart here, you can see the CME open interest collapsed on the 5th. Right? That's the basis trade unwinding. But then you can see it came right back on the sixth when traders re-entered at better levels. Meanwhile, Binance open interest collapsed and stayed down. Now, that tells you the whole story. The traditional finance side broke Bitcoin. The traditional finance side put it back together. and the cryptonative side, it took the real damage.
Okay, so now if we take that and we take a step back, right? and and we just look for a second because I think most people, they're looking at all this completely wrong. So sure, Bitcoin crashed 13% in a single day and there was no FTX. There was no hack, right? There was no regulation. There was no one entity that blew up. It was just the financial systems own plumbing working exactly as it's designed to work, right? Margin calls triggered degrossing. degrossing hit hedge positions, hedge positions unwound, it triggered feedback loops, and then the whole thing cascaded down. Now, most people hear that and they think that's terrifying, right? Bitcoin's fragile. It's at the mercy of Wall Street's plumbing. But that's not what the data is actually telling you, right? The old playbook, the having cycles, the onchain indicators, the historical patterns, none of that saw this coming, right? None of it could because those tools, they were built for a market structure that just it just doesn't exist anymore. Bitcoin doesn't just trade on crypto exchanges anymore, right? Between crypto people. It trades now inside the most complex financial plumbing in the world. And that of course changes everything about how it moves.
But here's what most people are missing in this. Right? This is the key to the whole video right here. Everything I just described to you, it works in both directions, right? the feedback loops, the dealer hedging, the reflexive mechanics, all of it compounds in both directions, right? We just saw what it does to the downside. But when you squeeze fires the other way with the same ETF plumbing, the same options market, the same institutional positioning, and by the way, NASDAQ just increased the open interest limits on IBIT options. So, when you get that, it's going to be more vertical than anything we've ever seen. And through all of it, through a 13% crash, a six sigma event, the worst day for multistrat funds, right? in recent history, at least, the ETF saw net inflows, the long-term holders, they they didn't flinch.
Now, let me bring this home, right? The recent crash again was a three and a half or six sigma event, right? It was a black swan. For Bitcoin to drop that much in a single day is unheard of. Now, for it to do it again, that'd be another six sigma event, right? It's basically statistically at least it's not possible. Very unlikely. Now, could we slowly grind lower? I mean, sure, anything's possible. But you need a reason for a slow grind, and I don't see one. What I do see is demand stacking up. Everywhere I look, I see treasury companies that are already price insensitive. They're buying to lower their average costs. I see new treasury companies like BSTR and XXI. They're about to come online and start accumulating. We see major banks are getting more involved. The US administration is positioning to be a Bitcoin superpower with multiple pieces of legislation that are moving through right now. At the same time, we have the executive order on the strategic Bitcoin reserve that's up and running, right? We have a runup in metals and and that shows massive demand for the hard assets, the debasement trade as JP Morgan called it. And we haven't even seen metal investors rotate into Bitcoin yet, right? But that's coming. Now, as Michael Sailor put it, we have the most constructive set of financial regulators in the history of this industry right now. The head of the Fed, Treasury, CFTC, SEC, and a digital assets are in the White House, right? Those are structural tailwinds. And here's the thing about institutional money, right? It it doesn't always move as fast. It doesn't move as fast as we want it to. Pension funds, sovereigns, treasury companies, they need time to aggregate the money, the position, right? Then maybe there's some sideways, some slow price action, you know, actually gives them some cover to accumulate without the bidding wars. But all that's happening right now.
So here's what I want you to take away from this video. The fragility of traditional finances margin rules is Bitcoin's anti-fragility. The same system that crashed Bitcoin 13% in a day, the same ETF plumbing, the same feedback loops, the same reflexive mechanics, that's the same system that's going to send it vertical. And it can happen at any time for no obvious reason, just like the crash.
So, let's let's just recap quickly what we went through because it's important, right? One, for Bitcoin's largest single day crash, there was no single culprit, right? No FTX, no hack, no rogue fund. It was the financial systems own plumbing. Two, the plumbing has three layers. Portfolio level degrossing. It triggered the selling, forced unwinds, and dealer hedging amplified it into cascade. And then the ETF absorbed the hit and showed net inflows anyway. And then three, and this is the big one, the same mechanics that caused the crash are the same mechanics that will drive the next move to the upside. Now, again, this isn't speculation. It's how the system is built. It cuts both ways. The market structure for Bitcoin has fundamentally changed. Yes, the old tools, they don't account for it. Yes, but the long-term trajectory, it hasn't changed at all. And so none of this invalidates my long-term price and adoption targets for Bitcoin in 2030, 2040, and 2050. If anything, it confirms them because it proves Bitcoin is now integrated into the deepest layers of the global financial system. And that integration is what drives the adoption curve.
Now, if you want to see what my targets are and the data behind them for Bitcoin in 2030, 2040, and 2050, then you might want to watch this video right here. Otherwise, leave me a comment, let me know what you think, and I'll see you on the next video.