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Review of the February 5 Crash

2026-02-24Beginner News

2026-02-24

Beginner News

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The cryptocurrency market has never been short of heart-stopping moments, but the crash on February 5, 2026, will undoubtedly leave a lasting mark on financial history. On that day, Bitcoin momentarily flash-crashed to the $60,000 mark, with total 24-hour liquidations across the network exceeding $2.6 billion. For most crypto-native investors, volatility of this magnitude might not be entirely unfamiliar. However, what truly baffled the market was that amidst a catastrophic price drop of 13.2%, spot Bitcoin ETFs—most notably BlackRock's IBIT—which should have faced massive redemptions, actually recorded surprising net inflows.

Opinions on the cause were divided: some attributed it to tightening macro liquidity, while others believed large holders were distributing at local highs. However, as more underlying transaction data surfaced, the truth behind this storm suggested that the issue was not the "fundamentals" of Bitcoin itself, but rather a "structural resonance" woven by traditional finance (TradFi) giants, multi-strategy hedge funds, and complex option hedging mechanisms.

The Vanishing Consensus: When Data Becomes Counter-Intuitive

In traditional crypto market logic, violent price declines are usually accompanied by large-scale capital outflows. For instance, when IBIT fell by 5.8% on January 30, the market saw $530 million in redemptions. Following this ratio, the "disaster-level" action on February 5 should have triggered net outflows of at least $1 billion.

Yet, the facts astonished everyone. Disclosed data showed that instead of shrinking, IBIT added approximately 6 million shares that day, attracting over $230 million in new assets. The entire ETF ecosystem recorded net inflows exceeding $300 million on the day of the crash. This divergence of "price down, capital up" indicated that the force driving the market was not simple directional bearishness.

We must pay attention to a staggering detail: IBIT's trading volume exceeded $10 billion that day, double its previous record. This was accompanied by record-breaking option volumes. Even more abnormal was the trading structure, which was dominated by put options. This coexistence of exceptionally high volume and net inflows points to one conclusion: the epicenter of this crash was not in the crypto-native circle, but within the "multi-strategy fund" ecosystem of Wall Street.

The "Circuit Breaker" of Multi-Strategy Funds: A 3.5 Standard Deviation Shock

To understand February 5, one must first understand multi-strategy funds (commonly known as "Pod Shops"). These institutions, such as Millennium or Citadel, typically run hundreds of independent trading teams across various asset classes. To control overall risk, they utilize extremely rigorous risk management systems.

Goldman Sachs' Prime Brokerage (PB) team revealed a key clue in a report: February 4 (the eve of the crash) was one of the worst single days on record for multi-strategy fund performance. The Z-score of their P&L volatility reached 3.5. In statistics, this represents an extreme event with a probability of only 0.05%—ten times rarer than a standard 3-sigma "Black Swan" event.

When such extreme losses occur, risk managers at multi-strategy funds do not analyze the long-term value of a specific asset. Their sole mandate is: immediate, indiscriminate, and emergency deleveraging.

Because spot Bitcoin ETFs have been deeply integrated into the portfolios of these funds, and since Bitcoin has recently shown a high correlation with software stocks (such as the IGV index), Bitcoin unfortunately became a liquid asset that these funds were forced to sell while "extinguishing fires." This explains why the selling pressure was so rapid and regardless of cost.

The Collapse of the Basis Trade: Forced Liquidation of "Neutral" Positions

One of the most popular strategies in the toolkit of multi-strategy funds is the "Basis Trade." Simply put, this involves buying spot Bitcoin (via ETFs) while simultaneously selling an equivalent amount of futures contracts on the CME (Chicago Mercantile Exchange). This strategy aims to capture the spread between futures and spot prices and is theoretically "Delta-neutral," meaning it profits as long as the spread exists, regardless of Bitcoin's price movement.

However, during the liquidity crisis of February 5, these seemingly safe hedged positions became a disaster zone. When funds are forced to deleverage globally, they must close both spot and futures positions simultaneously.

The closing action entails: selling IBIT in the spot market and buying back short positions in the futures market.

Data validates this. Looking at CME trends on February 5, the front-month basis jumped from 3.3% to 9%. This spike was not due to market bullishness, but because a massive volume of short positions was being urgently bought back to close out. This large-scale, passive spot selling instantly pierced the market's buy-side depth, causing Bitcoin's price to slide rapidly to $60,000. This is why we saw a price collapse that was not actually due to investors losing faith in Bitcoin, but because Wall Street traders were being "forced to close shop."

The "Negative Feedback" of the Options Market: The Curse of Gamma and Vanna

If the liquidation of basis trades was the fuse, then the market-making mechanism of the options market was the "accelerant" for this fire. This involves two advanced financial concepts: Gamma and Vanna.

In the options market, market makers are typically the counterparties to investors. When investors buy a large volume of put options, market makers are in a "Short Gamma" position. To remain risk-neutral, as the price falls, market makers must sell the corresponding amount of the underlying asset (in this case, IBIT) to hedge their risk.

On February 5, due to extreme market panic, Implied Volatility (IV) spiked significantly. Under the influence of the "Negative Vanna" effect, for every percentage point increase in volatility, market makers were forced to sell more spot to hedge.

To make matters worse, there were a large number of structural notes with "knock-in barriers" in the market. These products set specific price redlines (e.g., a specific price level for IBIT). Once the price dropped below that line, previously inactive put options would instantly "come alive," forcing dealers to continue selling the underlying asset with high intensity in an already extremely fragile market.

This mechanism created a terrifying negative feedback loop: price drop → volatility spike → market makers forced to sell hedges → further price drop. The intensity of this pressure even caused market makers to over-short in the short term, to the point of creating additional demand for ETF shares on their books, which precisely explains why the ETF eventually recorded net inflows that day.

The Violent Rebound of February 6: The Final Loop of Truth

The story took a dramatic turn on February 6, as Bitcoin quickly recovered lost ground, rebounding over 10%. A comparison of data from this rebound completely revealed the nature of the previous day's crash.

Comparing Open Interest (OI) data across major trading platforms reveals that CME open interest rose rapidly during the rebound, meaning the basis traders who were liquidated the day before were re-entering the market to capture the high spread that had soared to 9%. Meanwhile, the recovery of open interest on crypto-native exchanges was slower.

This indicates that the deleveraging on February 5 primarily occurred within the "paper capital system" of traditional finance. Once the forced liquidations of TradFi ended and arbitrageurs found the spreads extremely attractive, buying power rushed in, driving the price recovery.

This reversal proves once again that the crash was not caused by a deterioration in Bitcoin's fundamentals. On the contrary, it is the price Bitcoin must pay for its maturity as a "Global Macro Risk Asset": it must share the volatility pressure of the traditional financial system when structural crises arise.

Conclusion: Symbiosis of Anti-fragility and Evolution

Looking back at the storm of February 5, we see not only a profound market shakeout but a fundamental shift in Bitcoin's role.

Once, Bitcoin was seen as an "island" isolated from traditional markets; now, it has integrated deeply into the microscopic vessels of the global financial market. While this brings more complex sources of volatility—such as risk management protocols of hedge funds and hedging algorithms of option market makers—it also demonstrates remarkable "anti-fragility."

Despite suffering an extreme 3.5-standard-deviation shock and despite the collective deleveraging of top-tier Wall Street funds, the underlying subscription mechanism of Bitcoin ETFs remained robust, even attracting real buying during the crash. This performance under extreme pressure is, in fact, a powerful endorsement of Bitcoin as a long-term asset allocation tool.

For every investor in the space, this event provides a valuable lesson: when observing the market, one cannot simply stare at price curves. We need to understand the underlying capital flows, hedging structures, and the increasingly tight correlation between traditional finance and cryptocurrency.

Real opportunities are often hidden in the price troughs created by "structural failures." When multi-strategy funds are forced to sell their Bitcoin holdings due to losses in software stocks, that may not be a signal to exit, but rather an invitation from this digital golden lion to true value investors.

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