Hong Kong Hedge Fund Blowup Linked to Bitcoin's Sudden Crash of 2026

Bitcoin suffered a sharp correction this week, dropping nearly $15,000 in 24 hours. This marked the largest single-day loss since the collapse of Sam Bankman-Fried’s FTX in 2022. The price rebounded somewhat on Friday but remained volatile, trading near $70,000. The crash raised concerns among investors and analysts about the underlying cause of the selloff.

One prominent theory links the crash to a blowup at Hong Kong-based hedge funds. These funds had leveraged high-gamma call options on BlackRock’s IBIT, the largest Bitcoin ETF. The positions were financed through a yen carry trade, where Japanese investors borrowed low-cost yen to fund high-yield assets. However, when Bitcoin prices failed to rebound as expected, the positions faced liquidation.

The yen carry trade became a headwind after the Bank of Japan hinted at further interest rate hikes. Higher funding costs for leveraged positions forced the hedge funds to reduce exposure. At the same time, a failed bet on the silver market further strained their balance sheets. This created a perfect storm that led to forced sell-offs of IBIT shares and Bitcoin.

Why Did This Happen?

The hedge funds in question were not part of the traditional crypto ecosystem. Their trades occurred only through ETFs, meaning the market did not react in real time through crypto-native channels like social media or trading forums. As a result, the selloff caught many by surprise.

The collapse of these funds likely accelerated the broader market sell-off. When leveraged positions are liquidated, the forced selling can create a cascading effect. This was evident in the $2.5 billion in liquidations reported by data providers like CoinGlass and CoinGlass.

How Did Markets Respond?

The selloff was not isolated to Bitcoin. Other risk assets, including gold and silver, also fell sharply. This broad-based decline indicates a market-wide deleveraging, where investors retreated from speculative positions across multiple asset classes.

On-chain data also showed increased activity from large holders. Whale inflows to Binance surged in early February, suggesting major players were moving assets to exchanges for selling or hedging. Glassnode data indicated that realized losses for Bitcoin hit an 18-month high, signaling widespread capitulation among investors.

ETF flows further contributed to the pressure. Over the past four months, Bitcoin ETFs have seen more than $6 billion in net outflows. This reduced the natural buyer of last resort that typically supports the price during dips.

What Are Analysts Watching Next?

The yen carry trade and macroeconomic factors remain key areas of focus for analysts. The recent volatility in Japan's bond market—particularly the sharp rise in 40-year government bond yields—has raised concerns about leverage across global markets.

Bitcoin’s price movements often mirror leverage resets and liquidity events. In this case, the selloff appeared more mechanical than driven by a single event. Analysts are watching whether Bitcoin can hold above the $70,000 level or if further liquidation will drive prices lower.

Regulatory filings and market structure changes could clarify the role of the hedge funds. For now, the market remains cautious, with Polymarket offering bets on the identity of the fund responsible.

Until more data becomes available, the market is likely to remain fragile. Any new trigger—whether regulatory, macroeconomic, or sentiment-related—could reignite the selloff and test Bitcoin’s resilience.

The broader implications for the crypto market are clear: leverage and liquidity are now key vulnerabilities. With ETFs and large whale activity dominating price action, the market is more sensitive to macroeconomic shifts than ever before.