Bitcoin Hedge Funds Face Liquidation Trap as Collateral Splits Across Markets

Consider a hypothetical scenario: a hedge fund is profitable overall, yet one of its exchanges is poised to liquidate its position. Bitcoin prices have fallen, making its short position on CME profitable, while the corresponding long position on Hyperliquid is losing money. These two trades were designed to offset each other, but Hyperliquid cannot use profits held at CME to cover losses on its own books. Consequently, the fund must inject additional collateral before the exchange closes the position.

Transferring funds between exchanges takes time, and during market downturns, withdrawals can slow or halt entirely. A fund might possess sufficient assets to cover all positions globally but still lose half its hedge because the profits are trapped in a different account.

Once this occurs, a strategy designed to avoid directional bets on Bitcoin can suddenly transform into a massive bet on the asset’s next price movement.

In the high-stakes arena of institutional Bitcoin trading, a fund can be profitable across its entire portfolio and still face forced liquidation because the exchange holding its losing position is unaware of, or indifferent to, the profits generated elsewhere.

Furthermore, the more efficiently a fund utilizes its capital, the less cash it may have readily available to resolve such issues.

A 20% Bitcoin crash can break a perfectly good hedge

Consider another hypothetical: a fund holds two opposing Bitcoin positions. It is long Bitcoin on Hyperliquid and short Bitcoin futures on CME, with both positions valued at $4.5 million.

If Bitcoin drops 20%, the short position earns approximately $900,000, while the long position loses roughly the same amount, assuming both contracts track the price equally. On paper, the fund has not lost significant value from Bitcoin’s directional move. The short has offset the long, which was the primary objective of the trade.

However, exchanges do not view it this way.

Hyperliquid sees a losing position and demands sufficient collateral to keep it open. CME sees a profitable short position, but those profits reside in a different account, subject to different margin and settlement arrangements. The fund must transfer some of those profits or close both positions before Hyperliquid decides to liquidate the losing leg. If withdrawals are delayed, transfers are frozen, or the profitable trade cannot be closed quickly enough, the fund may find itself cash-strapped in one account despite having adequate assets across its portfolio.

Once Hyperliquid liquidates the long position, the fund is left holding a short position without an offsetting trade. It now loses money if Bitcoin rebounds, having gone to considerable lengths to avoid betting on Bitcoin’s direction in the first place.

Ian Weisberger, CEO of trading technology provider CoinRoutes, pointed to the disorderly exchange liquidations during the October 2025 crypto crash as an example of how dangerous this dynamic can become. Traders who believed their portfolios were balanced could suddenly be left exposed because an individual exchange closed one position without accounting for the other.

The issue is not necessarily that the fund made a poor bet; rather, the money required to sustain the bet was located in a place the exchange could not reach.

One million dollars goes a (surprisingly) long way

The problem intensifies when funds use borrowing and derivatives to stretch relatively small amounts of capital into much larger positions. Weisberger explained to CryptoSlate how a hedge fund depositing $1 million in USDC could, in theory, end up controlling $9 million worth of Bitcoin positions.

The fund begins with $1 million of its own capital and borrows an additional $2 million from a lender, giving it $3 million in working capital. It allocates $1.5 million to CME and $1.5 million to Hyperliquid, then uses derivatives to establish a $4.5 million position on each exchange. It can buy $4.5 million worth of Bitcoin exposure on Hyperliquid while selling $4.5 million through CME futures. This results in $9 million in total positions, financed with $1 million of the fund’s own money, $2 million borrowed from a lender, and additional leverage through derivatives.

The fund is not necessarily betting that Bitcoin will rise or fall. If Bitcoin increases by 10%, the long position makes roughly $450,000 while the short loses about the same amount, assuming both contracts track the price equally. Instead, the fund aims to collect the difference between futures prices, perpetual funding payments, or other small discrepancies, with its opposing positions keeping most directional exposure out of the trade.

The challenge is that the hedge must function in practice.

Any of a hundred different things could go wrong: futures and perpetuals can diverge, funding payments can become expensive, and even a 1% discrepancy between two $4.5 million positions amounts to a $45,000 difference. Even if prices eventually converge, the fund needs sufficient collateral to survive whatever occurs in the interim. Although the positions are intended to offset each other, exchanges still make their own margin decisions.

CME will not waive a collateral requirement simply because the fund has a profitable position on Hyperliquid, and Hyperliquid will not automatically credit profits that have not been transferred from CME. Maintaining large deposits at both exchanges would certainly help, but this can become expensive quickly when the entire business model depends on capturing small margins between markets.

The alternative is to make the same capital work harder, which introduces another problem: the more exposure a fund can support with every dollar, the more dependent it becomes on accessing that dollar when issues arise.

The exchange doesn’t care that your other trade is profitable

Traditional prime brokers have spent decades helping hedge funds manage financing, collateral, and trading across different markets, but crypto markets have always been more fragmented.

Funds trading Bitcoin futures at CME, perpetual contracts at Hyperliquid, and spot Bitcoin on another exchange must maintain separate pools of collateral even when all those positions are essentially part of the same strategy. This is because every exchange has its own margin requirements and settlement processes.

CRX Trade, a Swiss institutional prime brokerage built on CoinRoutes technology, is now attempting to coordinate these arrangements. It allows professional traders to manage Bitcoin, stablecoins, and tokenized assets as collateral across crypto exchanges and traditional markets, including Hyperliquid and CME. Instead of funding each exchange separately and hoping money can move quickly enough during a crisis, funds can manage their positions and financing through a single account.

Weisberger stated that the system considers both the total size of a fund’s positions and the remaining directional risk when they are assessed together. This is also why a lender might agree to finance a fund controlling nine times its original capital in trading exposure. The client has borrowed $2 million rather than $9 million, and the long and short positions are intended to offset each other.

CRX’s risk engine monitors positions across the portfolio and can begin reducing exposure before an individual exchange forces a liquidation. Under one approach, called delta-neutral liquidation, it attempts to close both sides of a hedge simultaneously. If a fund is short a Tesla perpetual and long an equivalent amount of tokenized Tesla shares, the system can unwind both positions as a pair instead of leaving the client with an unwanted bet on Tesla. Another method reduces whichever position contributes the most directional risk.

Both approaches are designed to avoid the situation where an exchange closes the losing half of a trade and leaves the fund exposed to a market move it was trying to hedge.

However, there is a limit to what coordinated risk management can achieve. Software cannot force an exchange to process an order during an outage, nor can it guarantee there will be someone willing to take the other side at a reasonable price. This is why a fund can still lose money closing its positions, especially when markets are moving quickly and buyers disappear. Exchanges still retain the right to liquidate positions that fail to meet their margin requirements.

CRX can recognize that two positions were meant to work together and attempt to prevent them from being separated.

Bitcoin can finance trades even where it isn’t accepted as collateral

The same approach can also allow funds to use Bitcoin holdings to support trades in markets where Bitcoin itself is not accepted as collateral.

Weisberger illustrated this with an example of a client holding $1 million in Bitcoin who wants to trade CME futures. The client transfers the Bitcoin to a crypto exchange, sells $500,000 worth, and replaces that portion of its holdings with $500,000 in Bitcoin futures or perpetuals. The fund now owns $500,000 in Bitcoin and holds another $500,000 in derivative exposure, so its sensitivity to Bitcoin’s price remains approximately the same. The spot sale has freed up $500,000 in cash, which can move through CRX’s USDC infrastructure to support trading at CME.

The money is not being used twice here. Only half of the original Bitcoin has been sold, and the fund has bought a contract to replace the exposure it gave up. That contract has its own margin requirements and financing costs, and the position can be liquidated if the fund cannot maintain sufficient collateral behind it.

Weisberger estimated that borrowing cash directly against Bitcoin would typically cost around 8%, while replacing some spot exposure with derivatives means paying the relevant futures basis or perpetual funding rate instead. This could be cheaper, although funding payments can fluctuate, and the fund must still account for fees and spreads.

The company did not provide a full comparison of actual costs under both arrangements. In either case, the fund found a way to put more of its existing capital to work. It also added another position that requires financing, margin, and a counterparty willing to keep the trade open when markets become disorderly.

Keeping collateral away from exchanges doesn’t eliminate the risk

One way to reduce exposure to an exchange failure is to avoid keeping all collateral at the exchange in the first place. CRX uses tri-party settlement where available, keeping collateral with a separate custodian instead of depositing it directly at the trading venue. The exchange processes the trades, but the assets remain with the custodian, and profit and loss are settled periodically.

Weisberger noted that these settlements can occur every eight or 24 hours. This can limit the amount directly exposed to an exchange withdrawal freeze to the unsettled profit and loss rather than the client’s entire collateral deposit. However, the extent of this protection depends on the agreements and settlement arrangements, and it does not prevent an exchange outage from interfering with trades that need to be closed.

This structure also introduces another institution whose obligations matter when issues arise. CRX Trade is operated by RAS Capital, a Swiss financial intermediary affiliated with VQF, a regulator-recognized self-regulatory organization. It is not a bank or securities firm and does not provide loans itself. Financing comes from independent lenders using the platform. Weisberger stated that clients retain legal ownership of assets held in dedicated, segregated wallets and exchange subaccounts.

However, if a client borrows money, the lender receives a lien over the portfolio collateral under a separate agreement. The Bitcoin still belongs to the client, but the lender has a legally enforceable claim against the pledged collateral if the client fails to meet its obligations. The agreement determines how much the fund can borrow, how the assets are valued, and when the lender can exercise its rights.

Meanwhile, the exchanges have their own margin requirements and contracts with the trader, while the custodian operates under a separate agreement governing where assets are held and who can access them.

Bringing everything into one account does not eliminate any of these relationships; it simply makes them easier to coordinate.

CRX did not provide the custody and lending agreements necessary to establish exactly what would happen if the platform, a custodian, or one of its lending partners became insolvent. Weisberger stated that clients retained ownership through segregated wallets, but recovering assets in an insolvency would depend on the contracts and laws governing each relationship.

Another important question is whether collateral can be pledged onward, something the company’s responses did not clarify. Thus, while keeping collateral away from an exchange can reduce one type of risk, it does not necessarily mean the assets will be immediately available when another institution demands payment.

Everyone still wants their money back

There is another problem with building large positions on borrowed capital: eventually, the lender will want its money back.

Weisberger stated that loans arranged through CRX usually run for 30 to 90 days, with leverage limits, collateral weights, and loan-to-value requirements agreed upon when the client borrows. The lender can decline to renew the loan when it matures, leaving the fund to repay the money or find another party willing to finance its positions. This can happen regardless of whether the fund’s trading strategy is profitable.

Exchange margin requirements and derivative funding costs can also change during the loan term, regardless of what the lender originally agreed to. Funds may then face demands for additional collateral from an exchange while also needing to repay or refinance money borrowed against the same portfolio. Shared collateral can make that portfolio more capital-efficient, but it cannot override the lender’s contract or an exchange’s rules. During a market disruption, the fund may need cash at several exchanges simultaneously, precisely when transfers become harder and closing positions gets more expensive.

This is the trade-off behind making institutional Bitcoin trading more efficient. There is no reason for a fund to keep unnecessarily large amounts of capital scattered across exchanges if it can coordinate its positions and collateral more effectively. Doing so can reduce unnecessary liquidations, free up capital, and make hedged strategies cheaper to operate.

However, it also allows funds to support larger positions without committing more of their own money. As those positions grow, it becomes increasingly important that lenders, exchanges, and custodians all fulfill their obligations simultaneously.

The better a fund gets at putting every dollar to work, the less money it has sitting around for emergencies. Shared collateral can reduce the risk of a profitable hedge being liquidated because its money is trapped in the wrong account. It cannot eliminate the underlying dependence on financing, liquidity, and exchange access.

The real measure of that efficiency will not be how much exposure $1 million can support when markets are calm, but how much of it the fund can safely keep open when everyone wants their money back.

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