By Nancy, PANews

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Unraveling the Mystery: Four Theories Behind Bitcoin’s Unprecedented Plunge

A “black swan” market crash has arrived, yet the elusive black swan itself remains unseen, adding an unsettling layer of mystery to the recent cryptocurrency downturn. With little to no warning, Bitcoin experienced a dramatic nosedive, plunging into its third-largest oversold zone in history. This swift capitulation shattered bullish sentiment and wiped out significant account balances, leaving the market grappling for a clear explanation.

While macroeconomic shifts, the Federal Reserve’s hawkish reassessment, tightening liquidity, and a cascade of leveraged liquidations offer partial explanations for the downward spiral, these conventional factors don’t fully capture the market’s current enigma. This article delves into four compelling, albeit atypical, theories attempting to shed light on this peculiar market behavior.

Theory 1: A Cross-Market “Bloodbath” Triggered by an Asian Giant

Franklin Bi, a General Partner at Pantera Capital, speculates that the recent widespread crypto sell-off wasn’t initiated by a dedicated crypto trading firm. Instead, he points to a large, non-crypto-native Asian entity operating outside the typical cryptocurrency ecosystem, thus remaining largely unnoticed by the crypto community due to its limited on-chain counterparties.

Bi’s detailed hypothesis suggests the entity engaged in leveraged trading and market-making on Binance. The unraveling began with the unwinding of Japanese Yen (JPY) carry trades, leading to an extreme liquidity crisis. Granted a roughly 90-day grace period, the entity reportedly attempted to recover losses through gold and silver trading, but failed. This ultimately forced a massive liquidation this week.

Essentially, this theory posits a “bloodbath” stemming from a cross-market leverage mismatch, triggered by spillover risk from traditional finance. JPY carry trades, historically a significant source of global liquidity where investors borrowed yen at near-zero cost to invest in higher-yielding assets, have been disrupted. With Japan entering an interest rate hike cycle and bond yields surging, this arbitrage strategy became untenable. Bitcoin, being highly sensitive to global liquidity, often serves as a “first-choice ATM” when carry trade funds are withdrawn. This theory gains credence from Bitcoin’s particularly sharp and rapid decline during Asian trading hours.

Parker White, Chief Investment Officer at DeFi Dev Corp, echoes this sentiment, characterizing the event as a cross-market liquidity stampede. White highlighted that on February 5th, BlackRock’s IBIT spot Bitcoin ETF recorded an astonishing $10.7 billion in trading volume—nearly double its previous record—alongside a historic $900 million in options premiums. With IBIT emerging as a dominant venue for Bitcoin options trading, the simultaneous decline of BTC and SOL, coupled with low CeFi liquidation volumes, leads White to suspect a forced liquidation of a major IBIT holder.

White further elaborates that multiple Hong Kong-based funds have allocated a significant, often 100%, portion of their assets to IBIT. Such concentrated, single-asset structures are typically designed to leverage isolated margin mechanisms. These funds likely utilized JPY financing for high-leverage options plays. Facing the dual pressures of accelerating JPY carry trade unwinds and a 20% drop in silver prices, the institutions’ attempts to recover losses by increasing leverage reportedly failed, culminating in a complete collapse due to a broken funding chain. As these funds are largely non-crypto-native and lack on-chain visibility, their inherent risks went undetected by the crypto community. White noted, however, that abnormally sharp drops in the Net Asset Value (NAV) of some related Hong Kong funds are now evident.

Drawing on White’s analysis and past 13F disclosure data, Avenir Group, the family office founded by Li Lin, stands out as Asia’s largest Bitcoin ETF holder, with 18.29 million IBIT shares, representing an exceptionally high concentration of 87.6% of its portfolio. Other firms like Yongrong (Hong Kong) Asset, Ovata Capital, Monolith Management, and Andar Capital Management also hold spot Bitcoin ETFs, albeit on a smaller scale.

Despite these compelling clues, White emphasizes that this remains a speculative phase. The lagging nature of 13F reports means detailed holding information won’t be available until mid-May. He also warns of potential holes in brokers’ balance sheets if liquidations aren’t fully completed in a timely manner.

Theory 2: US and UK Governments Selling Seized Bitcoin Hoards

Rumors regarding multiple governments potentially offloading vast quantities of seized Bitcoin have been circulating within the crypto community.

In the United States, the capture of Venezuelan President Nicolás Maduro in January fueled speculation that Venezuela, long plagued by economic crises and international sanctions, might have secretly amassed a “shadow reserve” of up to 600,000 Bitcoin. This ignited discussions about whether the US had confiscated these assets, though concrete on-chain evidence supporting Venezuela’s Bitcoin reserves remains elusive. Another concern arose last October with the arrest of Taikong Group founder Chen Zhi, which led to the freezing and confiscation of approximately 127,000 Bitcoin (valued at $15 billion at the time)—the largest crypto asset seizure in US history. Notably, US Treasury Secretary Scott Bessent recently confirmed that the US government intends to retain Bitcoin acquired through asset forfeiture.

Across the Atlantic, the United Kingdom’s actions are equally scrutinized. Last November, British police dismantled the UK’s largest-ever Bitcoin money laundering operation, arresting main suspect Qian Zhimin and seizing 61,000 Bitcoin.

While the combined Bitcoin holdings seized by the US and UK represent a significant potential source of selling pressure, there is currently no on-chain evidence of massive transfers or large-scale over-the-counter (OTC) sales.

Theory 3: “Deep Pocket” Funds Are Exhausted, Fueling Negative Liquidity Feedback

Even institutions traditionally considered “deep pockets”—such as sovereign wealth funds, colossal pension funds, and major investment groups—are now reportedly facing cash crunches, compelling them to sell assets to free up capital. This fundamental shift stems from the reversal of a decade-long macroeconomic environment characterized by low inflation, low interest rates, and abundant liquidity. Today, liquidity is no longer plentiful.

In a high-interest-rate environment, cash shortfalls are increasingly being addressed through asset monetization. Over the past few years, substantial capital was allocated to illiquid assets like private equity, real estate, and infrastructure. An Invesco report indicates that sovereign wealth funds, on average, are projected to have 23% of their portfolios allocated to illiquid alternative assets by 2025. The inherent difficulty in rapidly liquidating these assets has elevated liquidity management to a strategic priority.

Concurrently, a new wave of capital expenditure is rapidly approaching. Artificial intelligence (AI), in particular, has evolved into a global, extremely costly arms race. Investments in AI possess strategic importance and long-term commitment characteristics, demanding sustained, stable, and massive cash support. It’s estimated that sovereign wealth funds alone are set to invest $66 billion in AI and digitalization-related fields in 2025—a substantial test for any institution’s cash flow.

Against this backdrop, institutions often prioritize divesting assets with uncertain short-term prospects, high volatility, or relative ease of sale, such as underperforming tech stocks, crypto assets, and hedge fund shares. When an increasing number of forced sellers simultaneously enter the market, liquidity stress transcends individual institutional issues, evolving into systemic pressure. This ultimately creates a negative feedback loop that continuously suppresses the overall performance of risk assets.

Theory 4: Crypto OGs “Fleeing” the Market

Bitwise CEO Hunter Horsley suggests a psychological split in the market: while crypto natives and OGs (Original Gangsters) are reportedly succumbing to anxiety and selling their holdings—despite having navigated countless similar downturns over the past decade—institutional investors, wealth managers, and investment professionals are reportedly embracing the opportunity. They are now able to re-enter the market at price levels not seen in two years, or even at a 50% discount from just four months prior.

Crypto KOL Ignas further elaborates, positing that crypto natives are selling now due to an underlying fear of a 1929-style market collapse. He points to widespread exposure to warnings from figures like Ray Dalio about the end of a supercycle, discussions about an AI bubble, and anxieties surrounding unemployment data and “World War III” fears. The irony, Ignas notes, is that while the S&P 500 hasn’t crashed, the crypto market has. He characterizes this as “selling to each other”—a phenomenon where emotional traders, constantly online and immersed in the same narratives, collectively FOMO (Fear Of Missing Out) into assets and then panic sell together. While this constant engagement grants crypto natives an early edge in areas like NFTs, meme coins, and “vibe coding,” it also means they tend to trade in the same direction at the same time. In contrast, he argues, baby boomers and institutional investors, who aren’t spending 14 hours a day on crypto Twitter, simply tend to hold their positions.

Ignas also expressed a previous expectation that the introduction of Bitcoin ETFs would attract a more diverse range of holders with different time horizons. However, he believes this hasn’t materialized, and the crypto market largely remains retail-dominated. He concludes that while crypto natives perceive themselves as contrarian investors, when every “contrarian” shares the same thesis, it essentially becomes the consensus. He hopes the next cycle might bring genuine diversification.

Indeed, the actions of Bitcoin OGs have been cited as a significant factor contributing to recent price pressure, particularly with the activation of several Satoshi-era wallets last year, leading to the transfer of tens of thousands of BTC. While not all these transfers necessarily represent selling pressure (some could be for address upgrades or custody rotations), they objectively exacerbated market panic. However, a recent analysis by Cryptoquant analyst DarkFrost indicates a noticeable reduction in selling pressure from OG holders, with the current trend leaning more towards holding.

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