Arthur Hayes: Bitcoin Flash Crash May Have Been Caused by an IBIT Structured Product Issuer's Hedge

Bitcoin’s sharp price drop in late January 2026 highlighted structural weaknesses in Bitcoin ETF mechanics. Authorized participants, who normally balance ETF supply and demand, withdrew from the market during the crisis. This caused ETF prices to diverge from the underlying Bitcoin price.

The breakdown mirrored patterns seen in commodity ETFs during past crashes. When market makers exit, small sell orders can trigger large price drops. This dynamic was evident in the iShares Bitcoin Trust, which traded at a 1.2% discount to the spot price.

ETF arbitrage usually keeps prices in sync. But when market stress forces authorized participants to stop creating or redeeming shares, the system falters. This led to Bitcoin ETFs selling nearly $1.8 billion worth of Bitcoin in three days, regardless of price.

Why Did This Happen?

Authorized participants typically hedge their exposure by matching ETF inflows and outflows with Bitcoin purchases or sales. During the crash, they stopped because the risk became too high. Without these hedge strategies, ETFs could no longer absorb large sell orders.

The result was a mechanical sell-off unrelated to investor sentiment. Even if the market wanted to buy Bitcoin, the ETFs were forced to sell to meet redemption demands. This amplified the downward pressure on Bitcoin’s price.

How Did Markets React?

The selloff triggered a broader decline across crypto markets. Bitcoin fell below $73,000 in early February 2026, its lowest level since late 2024. The global crypto market dropped $467.6 billion in market value over the same period.

ETF outflows continued to mount. Bitcoin ETFs recorded over $2.9 billion in outflows from January 16 to February 7. The iShares Bitcoin Trust (IBIT) alone saw a $528 million outflow in a single day.

Inflows into altcoin ETFs remained modest despite the Bitcoin downturn. Ether, XRP, and Solana ETFs saw inflows of $14 million, $19.6 million, and $1.2 million, respectively.

What Are Analysts Watching Next?

Market observers are tracking ETF premium and discount levels as signs of recovery. The iShares Bitcoin Trust still trades at a 0.3% discount, indicating partial market normalization.

Bid-ask spreads remain wider than usual, another sign of ongoing stress. Normal ETF spreads are 2 to 3 basis points. During the crash, spreads reached 8 to 10 basis points.

Investors are also watching daily flows for signs of stability. Sustained inflows or outflows in a narrow range would signal that authorized participants are returning to the market.

Market makers remain cautious. Institutional investors are holding long-term positions despite short-term volatility. Some analysts expect ETF flows to stabilize within 2 to 4 weeks, based on historical patterns.

Bitcoin’s long-term trajectory remains uncertain. While institutional adoption is rising, regulatory clarity and market structure remain key factors. Short-term price action will depend on ETF recovery and broader market conditions.