What really caused the Feb. 5 crypto crash? Inside Jeff Park’s explanation
The sharp selloff in crypto on February 5 wasn’t primarily about Bitcoin itself or some hidden weakness in crypto markets, argues Bitwise advisor Jeff Park. Instead, he says, the drop was the byproduct of old‑fashioned traditional finance deleveraging spilling over into digital assets.
According to Park, the move was driven by three core dynamics:
1. Multi‑asset portfolios dumping risk across the board
2. Aggressive unwinding of CME futures basis trades
3. Options dealers forced into heavy hedging as markets moved against them
Together, these created a self‑reinforcing wave of selling that looked like a “crypto crash,” but actually started with stress in traditional multi‑strategy hedge funds.
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TradFi deleveraging, not a crypto‑only panic
Park points first to what happened in traditional hedge funds the day before the crash. Goldman Sachs’ prime brokerage desk reported that February 4 was one of the worst days in years for multi‑strategy funds, with performance showing a z‑score of 3.5. Statistically, that’s an event with roughly a 0.05% probability – around ten times rarer than a typical “three sigma” drawdown.
When that kind of loss hits multi‑strategy platforms and pod shops, risk managers act quickly. Park notes that these risk teams forced broad “de‑grossing” – cutting both long and short positions across many asset classes, regardless of the specific fundamentals. That kind of order flow is indiscriminate by design: the priority is reducing leverage and exposure, not fine‑tuning what to sell.
This is why February 5 turned into a generalized bloodbath. Crypto simply sat in the crosshairs as one of many risk assets held in size by these funds, rather than being uniquely targeted for crypto‑specific reasons.
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The CME basis trade: a key pressure valve blowing open
One of the main technical drivers of selling pressure was the unraveling of the CME basis trade. In simple terms, the “basis trade” involves buying spot Bitcoin while selling CME futures (or vice versa), capturing the spread between the two prices. It’s a common strategy among sophisticated funds, especially once regulated Bitcoin ETFs and futures markets became more liquid.
Park highlights that the near‑dated CME basis made an extraordinary move right through the turmoil. On February 5, the basis sat around 3.3%. By February 6, it had exploded to roughly 9% – one of the largest single‑day shifts since the launch of spot Bitcoin ETFs.
This kind of spike reflects intense dislocation. When multi‑strategy funds like Millennium and Citadel, which hold large positions in the Bitcoin ETF complex, begin unwinding basis trades, they often need to:
– Sell spot or ETF exposure
– Buy back futures they were previously short
That combination adds heavy selling pressure in spot markets precisely when liquidity is already stressed.
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Spot Bitcoin falls, but ETFs absorb massive demand
Despite the violent move, ETF flow data tells a more nuanced story about investor behavior. During the crash, Bitcoin dropped around 13.2%. Yet the IBIT spot ETF, one of the largest and most heavily traded Bitcoin funds, still recorded roughly 10 billion dollars in trading volume – double its previous daily record.
Even more telling: IBIT posted about 230 million dollars in net creations that day, with roughly 6 million new shares issued. That pushed overall ETF inflows above 300 million dollars. In other words, while leveraged and institutional structures were being forced to unwind, a different cohort of investors was quietly buying the dip through regulated products.
This divergence is crucial. It suggests the crash was less about long‑term holders capitulating and more about structured trades being forcibly dismantled as volatility exploded.
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Crypto trading looked more like software stocks than digital gold
Park also notes that, in the weeks leading up to the event, IBIT’s performance was closely tracking software equities rather than gold. That correlation pattern is a telltale sign. Multi‑strategy funds commonly use software and other growth stocks as part of broader funding and risk trades. Gold, by contrast, is rarely used in the same way by these strategies.
Because gold wasn’t at the center of these funding trades, its behavior diverged. The fact that Bitcoin ETFs moved more like high‑beta tech than “digital gold” reinforces Park’s point: the stress came from multi‑strategy funds cutting risk, not from retail investors or long‑only crypto believers dumping their holdings.
The catalyst, then, was the selloff in software and growth equities. As those positions got hit and risk managers demanded leverage cuts, exposure in Bitcoin ETFs and basis trades was trimmed alongside everything else.
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Structured products and knock‑in barriers: accelerants to the crash
Another underappreciated factor, according to Park, was the role of structured products with “knock‑in” barriers. These products, often sold to yield‑hungry investors, pay out coupons as long as the underlying asset stays above a certain price level. If the asset price drops and hits the barrier, the product can trigger forced hedging or unwind activity.
Park cites specific examples:
– A structured note from a major bank issued in November had a knock‑in barrier around 43,600 dollars for Bitcoin.
– Notes issued in December, following a 10% price drop at the time, likely included barriers in the 38,000–39,000 dollar range.
Once Bitcoin’s price began sliding and approached those levels, these barriers started to activate. As they did, the institutions who had sold those products needed to hedge more aggressively, usually by shorting or selling additional Bitcoin exposure. That selling pressure, layered on top of existing deleveraging, further accelerated the decline.
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Short gamma: options dealers were positioned the wrong way
The options market added another layer of instability. In the weeks before the crash, crypto‑native traders were heavily buying puts – essentially betting on, or hedging against, downside risk. For the dealers who sold those options, that meant ending up “short gamma.”
Being short gamma means that as the price of the underlying asset moves, the dealer must trade more in the same direction to stay hedged:
– When price falls, they’re forced to sell more
– When price rises, they’re forced to buy more
Park explains that dealers were short gamma particularly on puts in the 64,000–71,000 dollar range. As Bitcoin began to fall and volatility picked up, these dealers had to increase their hedges by selling into the decline. Compounding the issue, options had been priced too cheaply relative to the outsized move that eventually hit, so the hedging needs were larger than many anticipated.
This created a feedback loop: falling prices forced more selling from short‑gamma dealers, which pushed prices even lower, which required yet more selling.
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The recovery: CME interest rebounds, Binance open interest collapses
On February 6, markets staged a recovery – but the rebound revealed more about where the real stress had been. CME open interest (the number of outstanding futures contracts) expanded faster than that on Binance, one of the major offshore derivatives venues.
This pattern indicates that institutions and sophisticated traders were quick to re‑enter or rebuild positions via regulated CME markets. At the same time, the partial recovery of the basis trade helped offset the effect of ETF redemptions and outflows.
By contrast, open interest on Binance dropped sharply, suggesting that many high‑leverage or speculative derivatives positions on offshore platforms were wiped out or closed during the crash. The stronger bounce in regulated futures compared to offshore platforms reinforces the idea that institutional and basis‑related flows were central to both the drop and the rebound.
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Park’s conclusion: TradFi derisking lit the fuse
Putting all of this together, Park concludes that the crypto crash was not a standalone, crypto‑native panic. Instead, it was:
– Triggered by broad derisking in traditional multi‑strategy funds
– Amplified by the forced unwinding of CME basis trades
– Supercharged by structured product barriers and short‑gamma options dynamics
The selling wasn’t even primarily “directional” in the classic sense – it was mechanical. Risk managers demanded lower exposure, structured notes hit their barrier levels, options dealers mechanically hedged, and basis trades had to be closed. All of this combined to push Bitcoin into price zones where hedging activity intensified, magnifying the downside.
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What this crash reveals about today’s crypto market structure
Beyond the immediate cause, the February 5 event tells a deeper story about how crypto markets have matured and changed:
1. Crypto is now tightly wired into traditional finance.
With spot ETFs, CME futures, and complex structured products, Bitcoin is no longer only a retail‑driven asset. Its price action is now heavily influenced by multi‑asset hedge funds, basis traders, and institutional risk managers.
2. Leverage is often hidden inside “safe‑sounding” strategies.
Basis trades, yield notes, and structured products may seem conservative on paper, but they can embed significant leverage and path‑dependency. When volatility spikes, these supposedly neutral trades can become forced sellers.
3. Options and volatility markets matter more than ever.
Short‑gamma positioning turned what might have been a sharp but manageable dip into a cascading selloff. As liquid crypto options markets grow, these dynamics will likely play an even bigger role in future moves.
4. ETF flows provide a window into investor sentiment.
The fact that spot ETFs saw net creations and heavy volume during a 13% price drop suggests that long‑term, regulated capital was more inclined to buy than to panic‑sell.
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How should investors interpret such crashes?
For long‑term participants, understanding the mechanics behind this kind of move is crucial:
– A large part of the selling was forced and mechanical, not a referendum on Bitcoin’s long‑term narrative or adoption.
– Market structure shocks like basis unwinds and barrier breaches are often short‑lived, even if they feel dramatic in real time.
– ETF inflows during the decline show there was demand for exposure at lower prices, which can help establish a floor once structural pressure eases.
This doesn’t mean crashes are harmless. They expose over‑levered strategies, punish late‑cycle speculation, and can shake out weak hands. But they also reset positioning, reduce hidden leverage, and sometimes create better entry points for disciplined investors.
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Practical takeaways for navigating future crypto selloffs
While no one can time markets perfectly, there are lessons individual and institutional investors can draw from the February 5 episode:
1. Watch cross‑asset signals, not just crypto charts.
Severe stress in equities – especially in high‑beta sectors like software – can foreshadow derisking that spills into Bitcoin and other digital assets.
2. Track ETF flows and derivatives data.
Strong ETF inflows during a crash suggest that structurally committed capital is stepping in. Meanwhile, moves in futures basis and open interest can reveal whether selling is being driven by liquidations and unwinds.
3. Be wary of hidden leverage in “safe yield” products.
Structured notes, basis strategies, and complex yield enhancements can all become forced sellers when markets move quickly. If you don’t fully understand how a product behaves in a crash, consider that a red flag.
4. Use options thoughtfully, not emotionally.
Chasing cheap puts in size can help you personally hedge, but at a system‑wide level it can create short‑gamma imbalances that deepen crashes. For individual portfolios, pre‑planned, modest hedging strategies tend to be more sustainable than last‑minute protection buying.
5. Focus on time horizon and liquidity needs.
If your investment thesis is multi‑year, make sure your leverage, position size, and cash buffers are aligned with that horizon. Forced selling because of margin calls or short‑term obligations is often more damaging than any price move itself.
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The broader message: crypto’s growing up, along with its risks
The February 5 crash illustrates a paradox: as crypto becomes more institutional and more integrated with traditional finance, it benefits from deeper liquidity, new investor bases, and better infrastructure. At the same time, it becomes vulnerable to shocks that originate far outside the crypto ecosystem.
A selloff in software stocks, a risk manager’s decision at a large hedge fund, or an obscure barrier level in a structured product can now shape Bitcoin’s price as much as a halving event or a protocol upgrade. For anyone serious about understanding or investing in digital assets, that means:
– Studying market structure is as important as studying on‑chain metrics
– Paying attention to derivatives, ETFs, and cross‑asset flows is no longer optional
– Recognizing that some of the largest moves will be driven by non‑crypto players responding to their own constraints
In Park’s view, February 5 wasn’t a verdict on crypto’s future. It was a vivid example of how deeply Bitcoin has been woven into the fabric of global markets – and how the same forces that move stocks, bonds, and commodities now increasingly shape the path of digital assets as well.