What really happened in the Feb. 5 crypto crash? Inside TradFi’s role in the selloff
———————————————————————————–
The sharp crypto selloff on February 5 was not primarily a “crypto problem” at all, argues Bitwise investment advisor Jeff Park. Instead, the move was largely triggered by traditional finance (TradFi) deleveraging across multiple asset classes, with Bitcoin and crypto markets caught in the crossfire.
According to Park, the chain reaction that sent Bitcoin tumbling began with multi-asset portfolios unwinding risk, accelerated by basis trades blowing out on the CME, and then amplified by dealer hedging dynamics and structured products that were designed to protect investors — but ended up worsening the fall.
A brutal day for Bitcoin — but not for ETF demand
During the crash, Bitcoin (BTC) dropped roughly 13.2% in a matter of hours, a move that sparked panic across retail and institutional traders alike. Yet under the surface, one of the largest spot Bitcoin ETFs, IBIT, behaved very differently from what you might expect in a “capitulation” event.
IBIT recorded an astonishing 10 billion dollars in trading volume on the day — roughly double its previous record. Options markets also lit up, but with a notable twist: activity was led by put contracts rather than calls, signaling a spike in hedging and downside protection rather than speculative upside bets.
Despite the price carnage, IBIT still posted about 230 million dollars in net creations, with approximately 6 million new shares issued. That pushed total ETF inflows for the day above 300 million dollars. In other words, while Bitcoin’s spot price was falling hard, capital was still flowing *into* Bitcoin exposure through regulated ETF channels.
Why TradFi risk managers hit the brakes
To understand the scale of the stress behind the scenes, Park pointed to data from Goldman Sachs’ prime brokerage desk. On February 4 — the day before the crypto crash — multi-strategy funds experienced one of their worst daily performances in years, with a z-score of 3.5.
A move of that magnitude is statistically extreme. Park noted that this represented an event with an implied probability of just 0.05%, roughly ten times rarer than a “standard” three-sigma shock. For risk managers running complex, highly leveraged multi-strategy portfolios, that was more than enough to trigger aggressive risk reduction.
As a result, pod-based hedge funds and multi-strategy platforms were pushed into “indiscriminate de-grossing” — selling assets across the board, irrespective of their fundamentals. That broad-based deleveraging pressure set the stage for February 5 to turn into what Park described as a full-blown bloodbath.
CME basis trade: from quiet winner to source of chaos
A key piece of the puzzle was the CME Bitcoin futures basis trade — a staple strategy for sophisticated funds that go long spot Bitcoin while shorting futures to lock in a relatively low-risk yield from the spread between the two.
Park identified this basis trade as one of the central drivers of selling pressure. On February 5, the near-dated futures basis sat at around 3.3%. By February 6, it had exploded to roughly 9%, one of the largest single-day moves seen since the launch of Bitcoin ETFs.
For multi-strategy giants like Millennium and Citadel, which are known to hold sizable positions in the Bitcoin ETF complex, this sudden basis move was critical. As volatility surged and risk managers demanded less exposure, these funds were forced to unwind the trade: selling spot Bitcoin (including ETF shares) and buying back futures to close positions.
This mechanical selling into a falling market contributed to the sharp downside move, not because investors suddenly changed their long-term view on Bitcoin, but because their trading models and risk frameworks required rapid deleveraging.
Why Bitcoin traded like a tech stock — not digital gold
Recent trading patterns reinforced Park’s thesis that this was a TradFi-driven event, not a crisis of confidence among crypto-native investors. IBIT, he noted, had been trading more like a high-beta software or tech equity than like gold.
That correlation matters. Multi-strategy funds commonly use software and other growth equities as part of their funding baskets and risk books. Gold, in contrast, is typically *not* held in the same way by these funds, particularly when they implement funding or hedging trades.
The fact that IBIT tracked software equities more closely than gold suggests that the stress did not emerge from Bitcoin’s core investor base, but rather from these multi-asset funds cutting risk. The catalyst, Park argued, came from a broader selloff in software equities, which then spilled over into Bitcoin via shared investors, basis trades, and deleveraging mandates.
Structured products: hidden accelerators in the crash
Another underappreciated driver of the February 5 collapse came from structured products — complex instruments often sold to institutional or high-net-worth clients, many of which include “knock-in” barrier features.
These products are designed so that if Bitcoin’s price drops to a certain level (the barrier), specific payoff mechanics are triggered. That can force issuers and hedgers to sell more Bitcoin or adjust their exposure rapidly, often adding fuel to a downturn.
Park highlighted one such note priced by a major bank in November, which carried a knock-in barrier around 43,600 dollars. When Bitcoin fell through that level, the hedging activity associated with that product would have intensified selling.
Structured notes issued in December, when Bitcoin experienced a 10% decline, likely set barriers even lower — in the 38,000–39,000 dollar range. As prices approached those levels, more structured products would have been pushed toward their trigger points, further accelerating downside pressure.
Dealers, options, and the pain of being short gamma
The options market also played a crucial role in deepening the crash. In the weeks leading up to February 5, crypto-native traders had been actively buying puts, positioning for downside protection or speculative bearish bets.
That behavior left options dealers — the institutions that take the opposite side of these trades — in “short gamma” territory on those puts. Being short gamma means dealers’ positions lose delta as the market moves, forcing them to hedge dynamically in a way that amplifies price trends instead of smoothing them out.
Park observed that many of these short gamma exposures were concentrated in put strikes in the 64,000–71,000 dollar range. As Bitcoin dropped more sharply than implied by then-prevailing option prices, dealers needed to sell more spot or futures to stay hedged, turning what could have been a controlled pullback into a sharp cascade.
Importantly, options had been trading too cheaply relative to the eventual realized volatility. Once the big move arrived, that mispricing meant dealers were caught in an unfavorable feedback loop: forced to add hedges as the market fell, which pushed prices even lower.
A tale of two venues: CME vs. Binance
The post-crash recovery on February 6 revealed even more about who was driving the moves. Open interest — the total number of outstanding futures contracts — on the CME expanded faster than on Binance.
As the basis partially normalized, basis traders began stepping back in, rebuilding some of their positions. That activity helped absorb some of the selling pressure and mitigated ETF outflows. At the same time, Binance’s open interest collapsed, indicating that speculative or overleveraged retail positions were being wiped out or closed at a much larger scale on offshore venues.
This divergence reinforced the view that institutional, regulated-market activity — especially via CME futures — played a critical role both in the crash and in the early stages of the rebound.
TradFi derisking as the real trigger
Park’s overarching conclusion is clear: the initial shock came from TradFi derisking, not from a sudden loss of faith in Bitcoin among crypto investors. Multi-asset funds under severe pressure from equity drawdowns and risk constraints were forced to cut exposure, including in Bitcoin ETFs and basis trades.
That deleveraging pushed Bitcoin down to price zones where short gamma hedging kicked into high gear. At that point, the selling was no longer mainly about direction or conviction — it was about market structure. Non-directional hedging flows from dealers, structured product hedgers, and basis traders created powerful feedback loops that exaggerated the move.
What this means for investors: lessons from the Feb. 5 crash
For traders and long-term holders alike, the February 5 event offers several important takeaways:
1. Crypto is deeply linked to TradFi now
With the rise of spot Bitcoin ETFs and growing participation from large hedge funds, Bitcoin no longer trades in isolation. Stress in equity markets, especially in correlated sectors like software or growth tech, can now spill directly into crypto via shared investors and cross-asset risk mandates.
2. Market structure matters as much as narratives
The crash was not driven by a negative regulatory headline or a fundamental failure in Bitcoin. Instead, it came from structural forces: basis unwinds, short gamma positioning, and barrier-triggered hedging. Understanding these mechanics is increasingly important for anyone exposed to crypto at scale.
3. Options pricing can mask hidden risks
Cheap options may look attractive, but they can signal complacency about volatility. When volatility finally explodes, those who are short gamma — often large dealers — can be forced into large, market-moving hedging flows. Retail traders sitting on leveraged positions often get caught in the resulting whipsaw.
4. ETFs can stabilize demand even during crashes
The fact that IBIT saw strong net creations during a 13% Bitcoin drop suggests that institutional and advisory demand is more resilient than spot price action might imply. While ETF activity does not prevent volatility, it can provide a more stable channel for capital inflows during stress events.
5. Structured products can turn support levels into air pockets
Knock-in barriers around key price zones can turn what look like “support” levels on the chart into potential accelerators of volatility. Once those levels are breached, mechanical hedging can cause an air-pocket effect — where price falls faster than fundamentals alone would justify.
How should investors react to similar crashes?
When markets move as violently as they did on February 5, emotional responses often dominate: panic selling, impulsive revenge trading, or doubling down on leverage. Yet events like this are precisely when a disciplined framework matters most.
– Avoid impulsive leverage: High leverage is rarely your friend during systemic deleveraging. It can magnify small errors into catastrophic losses and force you to exit at the worst possible time due to margin calls.
– Know your time horizon: If your thesis is long term, short-term structurally driven crashes may represent opportunity rather than invalidation. But this only applies if your position sizing allows you to survive deep drawdowns.
– Diversify liquidity risk: Relying solely on one venue, one instrument type (like perpetual swaps), or one funding source can leave you exposed when liquidity dries up in a stress event. Using both spot and derivatives, and considering regulated products like ETFs, can spread risk.
– Understand cross-asset linkages: If you’re allocating to Bitcoin through ETFs or in a portfolio that also charges into high-beta equities, expect that stress in one bucket can spill into the other. Bitcoin’s role as “digital gold” doesn’t always hold on short timeframes when levered equity players are forced to sell.
The evolving character of Bitcoin volatility
One broader implication of this episode is how Bitcoin’s volatility is changing as institutional adoption deepens. Historically, crypto drawdowns were dominated by crypto-native factors: exchange blowups, protocol hacks, regulatory headlines, or leverage unwinds on offshore derivatives platforms.
Now, a growing portion of Bitcoin’s short-term risk stems from the same forces that drive moves in equities, credit, and macro markets: risk-parity adjustments, systematic strategies, multi-strategy pod funds, and basis trades linked to regulated futures and ETFs.
For some, that’s an unwelcome development — Bitcoin feels less “pure” and more entangled with Wall Street. For others, it’s a sign of maturation: a sign that Bitcoin has entered the mainstream of global capital markets, with all the complexity and interdependence that entails.
Looking ahead: preparing for the next shock
The February 5 crash is unlikely to be the last time that cross-asset deleveraging hits Bitcoin. As participation by traditional hedge funds and asset managers grows, the asset will increasingly respond to shifts in funding conditions, interest rates, equity valuations, and risk appetite far beyond the crypto ecosystem.
Investors who recognize this shift can adapt by:
– Monitoring correlations between Bitcoin, tech equities, and broader risk assets.
– Paying attention to futures basis behavior on regulated exchanges.
– Watching options skew and implied volatility for signs of complacency or stress.
– Treating ETF flows as an important — but not sole — indicator of institutional sentiment.
Ultimately, Park’s analysis frames the February 5 event not as a referendum on Bitcoin’s long-term value, but as a vivid demonstration of how deeply the asset is now woven into the machinery of global finance. For participants in this new environment, understanding that machinery is no longer optional — it’s essential.