Tracing The Crypto Market Selloff: Hong Kong Hedge Funds, Or TradFi Cross-Asset Whales?

Via Wu Blockchain,

Market Turmoil Sparks Rumors

In early February 2026, the crypto market saw a sharp correction, with Bitcoin briefly falling to around $60,000, its lowest level since November 2024. The selloff closely coincided with cross-asset deleveraging across traditional financial markets: equities declined markedly, while precious metals also suffered steep losses — silver posted one of its largest single-day declines on record, while gold saw its largest one-day drop since the early 1980s. Analysts broadly attributed the crypto downturn to rising macro uncertainty (such as reports of a more hawkish candidate for Federal Reserve chair) and large ETF outflows.

Against this backdrop, a narrative began circulating on crypto social media suggesting that the violent selloff was not driven purely by macro factors, but instead originated from the blow-up of a large fund forced to liquidate its Bitcoin positions. One line of speculation pointed to a Hong Kong hedge fund active in Bitcoin options trading. Multiple industry participants subsequently joined the discussion, offering both clues and strong skepticism.

Parker’s Hypothesis: Early Bitcoin Long-Term Holders, IBIT, and a Volatility Squeeze

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

He noted that on July 29, 2025, U.S. regulators formally approved in-kind creation and redemption for Bitcoin ETFs, allowing investors to exchange real BTC directly for ETF shares and vice versa. This enabled large holders to move Bitcoin into ETFs (such as iShares Bitcoin Trust, commonly referred to as IBIT) under potentially tax-efficient, near-zero-slippage conditions, thereby gaining access to regulated options markets.

According to Parker, IBIT’s options market rapidly developed into one of the most liquid Bitcoin options venues globally, second only to SPY, QQQ, and SPX index options. This attracted substantial whale activity deploying covered call strategies and volatility-selling on ETF holdings. Throughout the summer of 2025, observers saw large-scale migration by early Bitcoin long-term holders, while realized volatility, implied volatility, and overall trading volume in Bitcoin compressed significantly. In Parker’s view, widespread options writing effectively suppressed market volatility.

This apparent calm was shattered during the October 10, 2025 selloff (“10/10”). Parker speculates that at least one, and possibly multiple, funds selling volatility on IBIT were severely hit when volatility suddenly spiked.

In his scenario, a fund backed by early Bitcoin holders may have been running income strategies on massive IBIT positions. This model had worked until October 10, when the short-volatility exposure was decisively breached, resulting in heavy losses. That initial blow-up may have triggered a chain reaction, especially if the affected funds then spent subsequent months quietly attempting to repair their balance sheets. Parker emphasizes that this remains a hypothesis based on fragmented clues, and that direct evidence is still lacking.

Dovey Wan: No Signs of Hong Kong Funds Blowing Up

Primitive Ventures founding partner Dovey Wan pushed back firmly against the “Hong Kong hedge fund quietly blew up” narrative, offering several key observations from her position inside the Hong Kong fund ecosystem.

First, Hong Kong imposes no capital gains tax, meaning any “tax-loss harvesting” logic driving ETF redemptions or selling is fundamentally U.S.-centric and does not apply locally. Hong Kong funds have no incentive to sell for tax reasons.

Second, she disclosed that her team is currently conducting due diligence on one of Hong Kong’s largest Bitcoin options funds, and based on both recent performance and direct conversations, “there has been nothing abnormal since October 11.” Hong Kong’s crypto investment circle is extremely small and information travels quickly; if a major fund had blown up, it would be nearly impossible to conceal for long. She cited the previous episode involving the Hong Kong market maker Taipingshan linked to 3AC, where the industry knew almost by the second day. As of early February, she had heard no credible information supporting the claim of a Hong Kong fund collapse.

She further noted that many Asian Bitcoin OGs had already moved BTC into structures like IBIT via Galaxy Digital and similar channels well before in-kind redemption was approved. Their motivations were primarily safer custody, lower operational and counterparty risk, easier collateral mobility within TradFi, and cleaner liquidity for rotation into other assets. As such, Asian whales’ use of IBIT is not a recent phenomenon and does not inherently imply financial stress.

Wan also observed that since the second half of 2025, Bitcoin liquidity has increasingly concentrated during U.S. trading hours, especially around the New York open. Recent spot selling has likewise clustered in those windows, which she views as more consistent with ETF redemption flows than a single fund collapse.

Finally, she argued that standard options writing alone is unlikely to cause catastrophic losses for a Bitcoin fund unless it involves naked options or highly leveraged basis trades. Conventional covered strategies are relatively conservative; true blow-ups typically imply excessive leverage or cross-asset margin structures. Therefore, if someone did fail via options, she leans toward it being a TradFi multi-strategy fund with cross-asset margining, rather than a purely crypto-native institution.

Franklin Bi: A Hidden Asian Macro Trader?

Pantera Capital partner Franklin Bi offered another perspective. He speculated that the real distressed party might not be crypto-native at all, but rather a large traditional trading firm based in Asia with some exposure to crypto.

Because such institutions often have few crypto-native counterparties, even severe losses might not immediately surface within crypto circles. He outlined a possible sequence of events: the institution had previously been market-making on platforms such as Binance while maintaining leverage funded by cheap capital (potentially via the JPY carry trade); the rapid appreciation of the yen combined with the October 10 Bitcoin liquidity shock materially damaged its balance sheet, triggering margin stress; the firm may then have received an approximate 90-day reprieve to stabilize; during that period it attempted to recover losses through gold and silver trades, but the recent ~20% single-day collapse in silver alongside gold’s decline worsened its position; ultimately, in early February 2026, it was forced to liquidate remaining crypto holdings, precipitating the concentrated Bitcoin selloff.

Franklin acknowledged this is speculative, but described it as “a reasonable sequence of events.” This framework also explains why the crypto community did not detect it early — the player would not belong to traditional crypto fund networks. Parker additionally pointed out that certain 13F filings show funds with nearly 100% allocation to IBIT, potentially designed to isolate single-trade risk. If one such single-asset fund collapsed, it would fit this profile.

Hard evidence remains absent. Parker noted that the decisive proof would be a Q1 2026 13F filing showing a large fund’s IBIT position dropping to zero, though such disclosures will not be available until mid-May.

Industry Skepticism: The View from Wintermute’s CEO

Wintermute CEO Evgeny Gaevoy expressed strong skepticism toward claims that “someone blew up.” He noted that when large institutions fail, informal industry channels usually surface warnings quickly — as happened with 3AC and FTX, where internal alerts emerged within days. This time, he sees no similar signals, and current rumors originate almost entirely from anonymous accounts.

He also emphasized that unlike the previous cycle, where hidden leverage accumulated via uncollateralized lenders such as Genesis and Celsius, today’s crypto leverage is largely concentrated in exchange perpetual markets, which are more transparent and orderly. Exchanges now employ automatic deleveraging and stricter margin controls, making large collapses harder to conceal.

Gaevoy likewise doubts the existence of FTX-style exchange-level issues, arguing that no institution would replicate that model post-FTX. Moreover, if an entity were in fact insolvent yet publicly denying it, it could face serious legal consequences in the U.S., U.K., EU, or Singapore — significantly reducing the feasibility of prolonged concealment.

In his view, the episode more likely reflects macro pressure combined with the liquidation of highly leveraged traders: “Maybe someone blew up, but there simply aren’t systemic spillover effects worth worrying about.”

Conclusion: The Truth Has Yet to Emerge

The true cause of Bitcoin’s early-February 2026 plunge remains unresolved. Macro factors clearly played a major role, but the persistence of the decline and certain anomalous trading volumes continue to prompt the market to search for more specific triggers.

Two main explanatory paths currently exist.

One centers on early Bitcoin long-term holders selling volatility via ETF structures, suffering outsized losses during the October 10 selloff and being forced into final deleveraging recently.

The other points to TradFi cross-asset strategies failing — spreading from yen carry trades into crypto and precious metals — triggering cascading margin pressure that ultimately manifested as concentrated Bitcoin selling.

As of now, no public filings, official disclosures, or confirmed loss figures substantiate either narrative. Multiple industry participants urge caution, noting that if structural issues truly exist, their impact will eventually surface through internal information channels or upcoming 13F disclosures.

Regardless of the ultimate answer, this episode once again highlights how deeply crypto markets are now intertwined with traditional finance. Shocks need not originate from crypto-native players; macro leverage and cross-asset risk can exert equally material impact on digital assets. Until facts are clarified, speculation remains highly susceptible to amplification.

As many industry voices have repeatedly emphasized, low liquidity combined with high leverage is often a powerful amplifier of market volatility.

That lesson is once again being reinforced by the markets of 2026.