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BlackRock Bitcoin ETF alternatives surge amid market turmoil: Hedge fund failure or mere market volatility?
Options trading on BlackRock’s spot bitcoin ETF, IBIT, skyrocketed to an unprecedented 2.33 million contracts on Thursday as bitcoin experienced a significant decline.
Ship on turbulent waters. (Pixabay)
Key points:
- Options trading on BlackRock’s spot bitcoin ETF, IBIT, reached an all-time high of 2.33 million contracts and $900 million in premiums as the fund dropped 13% to its lowest point since October 2024.
- One perspective, represented by analyst Parker, links the record options trading and significant selling to a leveraged hedge fund collapse that offloaded IBIT shares amid margin calls, exacerbating the downturn.
- Conversely, another viewpoint suggests that the flows primarily represent widespread market fear and typical risk management instead of a singular disastrous fund event, highlighting that IBIT options now significantly impact crypto markets.
BlackRock’s spot bitcoin exchange-traded fund has proven to be extremely popular since its launch, attracting billions from investors looking for exposure to the cryptocurrency without the complexity of crypto wallets or exchanges. Traders and analysts closely monitor inflows into the fund to understand how institutions are positioning themselves in the market.
They may now need to apply the same scrutiny to options associated with the ETF, as activity surged during Thursday’s decline. According to one analyst, the record trading was due to a hedge fund collapse, while others contended that it was driven by typical market turmoil.
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What stood out
On Friday, as the ETF fell 13% to its lowest level since October 2024, options trading surged to an unprecedented 2.33 million contracts, with puts slightly exceeding calls.
The greater volume of puts compared to calls on Thursday signifies a stronger demand for downside protection, a common trend during price declines.
Options are derivative contracts that offer built-in protection against fluctuations in the price of the underlying asset, which in this case is IBIT. A small fee (premium) is paid for the right, but not the obligation, to buy or sell IBIT at a predetermined price by a certain deadline or expiry.
A call option allows you to secure IBIT at a specific price today for a minor premium. If it increases above that price later, you can buy at a low cost and sell for profit; if it does not, your only loss is the premium. Conversely, a put option secures the sale of IBIT at that price. If it falls below, you can sell high and retain the difference; otherwise, you would only lose the premium. Calls present leveraged upside opportunities, while puts provide protection against downside risks.
Another notable statistic was the record $900 million in premiums paid by IBIT options buyers that day—the largest single-day total ever. For context, this amount is comparable to the market capitalization of several cryptocurrencies ranked beyond the top 70.
Speculative theory: record activity linked to hedge fund collapse
A post by market analyst Parker, which gained significant attention on X, suggests that the $900 million premium payments were a result of the collapse of a large hedge fund (one or more) that had nearly all its funds invested in IBIT. Hedge funds often concentrate their investments in one asset to minimize risk exposure elsewhere.
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Parker’s post claims that this fund initially purchased inexpensive “out of the money” call options on IBIT following the October downturn, expecting a swift recovery and a larger rally.
These OTM calls are akin to inexpensive lottery tickets at levels significantly above the current price of the underlying asset. If the asset appreciates past these levels, these calls yield substantial profits; if it does not, the buyers of these calls forfeit the initial premium paid.
However, the fund financed these calls with borrowed capital. As IBIT continued to decline, they increased their investment.
On Thursday, as IBIT dropped sharply, the value of these calls plummeted, and brokers issued margin calls demanding cash or collateral from the fund. The fund, having incurred losses elsewhere, was unable to provide the required cash and consequently sold off large quantities of IBIT shares in the market, leading to a record $10 billion in spot volume.
The fund also hurried to replace expiring calls or close losing positions, resulting in an unprecedented $900 million in total premium payments. Essentially, Parker attributes the record activity to one or a few significant players reacting, rather than normal trading behavior.
Shreyas Chari, director of trading and head of derivatives at Monarq Asset Management, summarized: “Systematic selling across the majors yesterday was likely linked to margin calls, especially in the ETF with the greatest crypto exposure, IBIT.”
“Rumors circulated about a short options entity that had to sell the underlying much more aggressively after breaking the 70k and then 65k levels, likely related to liquidation thresholds. This intensified the drop to 60k,” he elaborated in a Telegram discussion.
Options expert disagrees
Tony Stewart, founder of Pelion Capital and an options expert, acknowledges that IBIT options contributed to market volatility but does not attribute the entire crash and record activity to a single hedge fund collapse.
He remarked on X, referencing Amberdata, that $150 million of the $900 million in premiums originated from repurchasing put options. In essence, traders who had previously sold (shorted) puts faced considerable losses as IBIT declined and those puts increased in value, prompting them to buy them back to mitigate their risk.
Those were “certainly painful” closures, he stated on X, adding that the remaining portion of the $900 million in premiums mostly consisted of smaller trades, which is typical for an active trading day.
In Stewart’s view, the record activity reflects the chaotic noise of a broadly fearful market rather than a definitive indicator pointing to a specific cause. “This [hedge fund collapse theory] lacks conclusive evidence from the options perspective. It also does not appear sufficiently significant, to be honest,” he concluded.
Still, he acknowledged the possibility that some trading activity could have been concealed in over-the-counter (privately negotiated) transactions.
Conclusion
While Parker linked the events to a hedge fund collapse, Stewart countered this with concrete data.
Regardless, this situation emphasizes that IBIT options have grown large enough to exert influence, and traders may need to monitor them just as they do ETF inflows.
