The source of the cryptocurrency market crash: Hong Kong hedge funds or TradFi cross-asset giants?

Editor** | **Wu Says Blockchain

Market Turmoil Triggers Rumors

In early February 2026, the crypto market experienced a severe correction, with Bitcoin briefly dropping to around $60,000, the lowest level since November 2024. This round of selling was highly synchronized with the cross-asset deleveraging in traditional financial markets, where stock markets saw significant declines and precious metals also faced sharp drops—silver recorded a record single-day decline, while gold experienced its largest single-day drop since the early 1980s. Analysts generally believe that the recent downturn in the crypto market is primarily due to rising macroeconomic uncertainty (such as the hawkish nomination of the Federal Reserve Chair) and large-scale outflows from ETFs.

Against this backdrop, a narrative began circulating on crypto social media: this fierce sell-off was not entirely driven by macro factors but was instead triggered by a large fund facing liquidation and being forced to close its Bitcoin positions. One speculation pointed to a Hong Kong hedge fund involved in Bitcoin options trading. Several industry insiders subsequently joined the discussion, providing clues while also expressing clear skepticism.

Parker's Hypothesis: Early Bitcoin Long-Holders, IBIT, and Volatility Compression

Crypto commentator Parker (@TheOtherParker_) proposed an explanation linking this downturn to changes in how large long-term holders of Bitcoin (early Bitcoin long-holders) manage their assets.

He noted that on July 29, 2025, U.S. regulators officially approved the physical purchase and redemption mechanism for Bitcoin ETFs, allowing investors to directly exchange real BTC for ETF shares and vice versa. This enabled large holders to transfer Bitcoin into ETFs (such as iShares Bitcoin Trust, commonly referred to as IBIT) under potentially tax-exempt conditions and with near-zero slippage, thus utilizing the regulated options market.

According to Parker, the options market for IBIT quickly developed into one of the most liquid options markets globally, second only to SPY, QQQ, and SPX index options. This attracted a large number of Bitcoin whales to deploy covered call and volatility selling strategies on ETF holdings. Throughout the summer of 2025, the market observed a massive migration of early Bitcoin long-holders, while Bitcoin's realized volatility, implied volatility, and overall trading volume showed a significant contraction. In Parker's view, the large-scale selling of options effectively compressed volatility in the market.

This apparent calm was shattered by the crash on October 10, 2025. Parker speculated that at least one or more funds selling volatility on IBIT were severely impacted when volatility suddenly spiked that day.

In his scenario, a fund involving early Bitcoin long-holders might have been running a covered call strategy on a substantial IBIT position, a model that had been effective until October 10, when it was completely overwhelmed by the short volatility positions, leading to significant losses. This initial liquidation could have become the starting point for a subsequent series of chain reactions, especially as the related funds attempted to quietly repair their balance sheets in the following months. Parker emphasized that this is merely a hypothesis based on scattered clues, and direct evidence is still lacking.

Franklin Bi: Macro Traders Hidden in Asia?

Pantera Capital partner Franklin Bi provided another perspective. He speculated that the real problem might not be a crypto-native fund at all, but rather a large traditional trading institution based in Asia that also engages in crypto trading.

Since such institutions have almost no crypto-native counterparties, even if they suffer massive losses, they might not be immediately detected by the crypto community. He outlined a possible chain of events: the institution had previously engaged in market-making on platforms like Binance while using cheap funding (possibly from yen arbitrage) to maintain leverage; then, the rapid appreciation of the yen combined with the liquidity shock in Bitcoin on October 10 caused substantial damage to its balance sheet, triggering margin pressure; afterward, the institution might have received about a 90-day grace period to attempt to rectify the situation; during this time, it turned to the gold and silver markets to try to recover previous losses, while the recent 20% single-day drop in silver and simultaneous decline in gold further worsened its situation; ultimately, in early February 2026, it was forced to liquidate its remaining crypto positions, leading to this round of concentrated Bitcoin selling.

Franklin admitted this is just speculation but believes it is "a reasonable sequence of events." This also explains why no one on crypto Twitter noticed anything beforehand, as this player does not belong to the traditional crypto fund circle. Parker also pointed out that some 13F filings show that certain funds are nearly 100% allocated to IBIT, possibly to isolate single trade risks. If one of these single-asset funds were to face liquidation, it would fit the aforementioned profile.

Currently, there is still a lack of hard evidence. Parker stated that the real key evidence would be if a large fund's IBIT position were to go directly to zero in the 13F disclosures for the first quarter of 2026, but such documents will not be made public until mid-May.

Some voices in the community suspect that this Asian fund might be one associated with Li Lin. On February 8, Huobi founder Li Lin responded in his social circle, stating that he is neither an investor in LD or Garrett Gin and has not reduced his BTC or ETH holdings during this market cycle, adding that he has been the subject of rumors multiple times in recent years and has had to clarify repeatedly.

According to the SEC's latest 13F report, as of the end of the third quarter of 2025, Avenir Group, founded by Li Lin, held 18,297,107 shares of IBIT, with a market value of $1.189 billion, an increase of about 18% from the previous quarter, and has remained the largest Bitcoin ETF institutional holder in Asia for five consecutive quarters.

Industry Skepticism: The View of Wintermute's CEO

Wintermute CEO Evgeny Gaevoy expressed strong skepticism regarding the claim that "someone has liquidated." He pointed out that if a large institution were to collapse, private channels in the industry would usually spread the news quickly. When 3AC and FTX faced issues, internal warnings emerged within days, but no similar signs have been observed this time, with all rumors coming from anonymous accounts.

He also emphasized that compared to the previous cycle, where risks were hidden in uncollateralized lending platforms like Genesis and Celsius, crypto leverage is now mainly concentrated within the perpetual contract systems of exchanges, which are more transparent and orderly. Exchanges have introduced automatic liquidation and stricter margin management, making large-scale liquidations harder to conceal over the long term.

He similarly doubted the existence of exchange-level issues similar to FTX and noted that no institution would replicate that model after FTX. Moreover, if an institution were indeed bankrupt but publicly denied it, it would face severe criminal liability in the U.S., U.K., EU, or Singapore, significantly reducing the likelihood of long-term concealment of bankruptcy.

In his view, this round is more likely just a market correction caused by macro pressure and high-leverage traders' liquidations: "Maybe someone has blown up, but it hasn't resulted in systemic spillover that warrants our attention."

BitMEX co-founder Arthur Hayes stated that the recent drop in Bitcoin is likely primarily due to the hedging actions of traders around IBIT structured products. He pointed out that related structured notes issued by banks could trigger concentrated hedging at specific trigger points, leading to rapid price fluctuations. He reminded market participants to adjust their strategies in a timely manner according to market mechanisms. He stated that BTC derivatives do not cause price fluctuations but only amplify volatility in both directions. There is no secret conspiracy in the cryptocurrency market that leads to a crash. Without government bailouts, the market can quickly clear over-leveraged investors and restore an upward trend.

Conclusion: The Truth Remains Unclear

The true cause of Bitcoin's plunge in early February 2026 remains unresolved. Macro factors undoubtedly played an important role, but the persistence of the decline and the scale of some abnormal trades continue to prompt the market to seek more specific triggers.

Currently, there are mainly two explanatory paths: one is that early Bitcoin long-holders continuously sold volatility through the ETF structure and suffered a fatal blow after encountering severe reverse volatility on October 10, leading to forced final deleveraging recently; the other is that a TradFi cross-asset trading failure spread from yen arbitrage to the crypto and precious metals markets, triggering a chain of margin pressures, ultimately manifested through concentrated Bitcoin selling.

As of now, there are no public documents, official disclosures, or clear loss data to confirm either claim. Several industry insiders have called for caution and pointed out that if there are indeed structural issues, their impact will eventually emerge through internal industry information flows or subsequent 13F disclosures.

Regardless of what the final answer may be, this incident once again demonstrates that the crypto market is deeply coupled with the traditional financial system. The shock may not necessarily come from crypto-native institutions; macro leverage and cross-asset risks can also have substantial impacts on digital assets. And before the facts are clarified, various speculations are easily amplified.

As many industry insiders have repeatedly emphasized, a low liquidity environment combined with high leverage often acts as an amplifier for severe market fluctuations.

This point is being revalidated by the market in 2026.