Bitwise Advisor Explains Enormous Crypto Crash

Bitwise advisor Jeff Park has taken to the X social media network to outline a rather compelling theory for the recent cryptocurrency carnage. 

The recent implosion of crypto can be mainly explained by institutional risk management, Park argues. 

Multi-strategy hedge funds are likely responsible for the extremely aggressive selling. According to Park, they forced a capitulation to satisfy internal risk models.

On Friday, the price of BTC collapsed to an intraday low of $60,255, erasing most of its ETF-driven gains. 

The “fast money” flush 

As noted by Park, roughly one-third of all Bitcoin ETF shares are owned by institutional players. Approximately 50% of that slice is held by hedge funds.

This capital is “fast money” that gets deployed in delta-hedged or relative value (RV) neutral trades rather than long-term directional bets.

“That’s a decent amount of fast money flows that can capitulate if the cost of funding or margin requirements tick up,” Park wrote.

Hedge fund risk managers often intervene to “shut risk down” when there is a spike in volatility. Widening spreads and spillovers from growth equity correlations can force them to unwind positions immediately.

“To sell when liquidity is as poor as it is is the typical ‘shut risk down’ behavior we’re seeing today,” Park noted

The analyst has pointed to massive turnover in Strategy (MSTR) stock as further evidence of this institutional scramble.

Volatility hits “code red”

Park has noted that Bitcoin’s implied volatility (IV) has spiked to 75%, a level not seen since the spot ETFs originally launched in early 2024. This is likely to be the main catalyst for this extreme forced selling.

“This is the highest level since the ETF launch in 2024. It is also finally higher than gold volatility. Know it’s a lot of pain right now, but this is all part of the process required for Bitcoin to make new highs,” Park said. 

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For the first time in a long time, Bitcoin volatility is finally higher than gold volatility. This could end the “low vol” regime that had attracted so much institutional leverage.

This is a classic case of “commonholder risk”: distinct funds all rush for the same narrow exit door simultaneously. This results in “all downside correlation to one.”

A fast melt-up

Despite the enormous crash, Park remains bullish on the medium-term outcome. He is convinced that the current pain is a necessary “process” to clear out the leverage and weak hands.  

“If that’s true, and when this all clears, I suspect we’ll reprice pretty quickly,” Park predicted. “The melt-up will be fast.”