Who Is Shorting ETH?

Recently, an asset allocation table from a mysterious institution leaked, notably showing a "31 billion US dollars' worth of Ethereum short position" in a "multi-strategy" investment portfolio.

So the question is, who is the holder of this $31 billion Ethereum short position?

BlockBeats reached out to various sources of this asset allocation table and speculated on the two most likely candidates:

First is Bridgewater Associates. Some other sources' leaked data aligns with this asset allocation table, and Bridgewater Associates' CEO Ray Dalio has expressed interest in cryptocurrency, being a Bitcoin maximalist to some extent, which aligns with the logic of shorting ETH.

Another highly discussed possibility is Citadel Securities, the focus of our discussion today.

A "Big Player" Falls, Another "Big Player" Rises

If you still remember Black Monday in August 2024, triggered by Japan's interest rate hike.

Japan's first rate hike post abandoning negative interest rates caused the yen to surge against the dollar, leading to a reversal in arbitrage trades that triggered massive liquidation. The global financial market instantly collapsed, with a 9% drop in Japan's stock market, the Nikkei index hitting the circuit breaker twice, marking the largest single-day drop in eight years. The South Korean and Taiwanese stock markets were not spared, with the cryptocurrency market also facing heavy losses, Bitcoin dropping below $50,000 briefly, and Ethereum plummeting more than 25%, completely erasing its year-to-date gains.

However, attributing the cryptocurrency crash solely to the Japanese economy was not convincing to everyone until some old-timers revealed insider information.

As an OG crypto kingpin predating even SBF, BitMEX co-founder Arthur Hayes took to social media to share that through traditional financial channels, he learned that a certain "big player" was liquidating their crypto assets.

While no names have been explicitly mentioned, the community's indications have been quite clear, pointing directly to Jump Trading and its cryptocurrency arm, Jump Crypto. Since June last year, the U.S. Commodity Futures Trading Commission (CFTC) has been investigating Jump Crypto. In addition to facing regulatory pressure, Jump Crypto has also been embroiled in several controversial events. Firstly, the collapse of FTX resulted in significant losses for Jump Crypto. Furthermore, Jump has attracted regulatory attention for its involvement in the TerraUSD stablecoin collapse event.

As the CFTC investigation deepened, Jump Crypto's young CEO, Kanav Kariya, announced his resignation, and Jump's official Twitter account also stopped updating, seemingly signaling Jump's gradual exit from the cryptocurrency industry's spotlight.

However, as one "big player" fell, another "big player" stepped onto the stage.

Yesterday, Citadel Securities, a market maker, announced plans to enter the cryptocurrency market-making field. Like a relay race among traditional financial giants, with Jump Crypto exiting, Citadel Securities, also from a traditional financial background, chose to take over the baton in the crypto market.

Both Jump and Citadel, as representatives of traditional financial giants, share similar backgrounds and strategies. Both companies started with market-making businesses, with Jump establishing a presence in the financial markets through high-frequency trading and Citadel becoming one of the largest market makers globally through hedge funds and equally high-frequency quantitative analysis. When Jump entered the crypto market, it brought a strong technical team, hardware, and financial support, and Citadel also possesses these advantages.

The Wall Street Legend of Citadel Securities

Citadel Securities is one of the largest market makers on the NYSE. Its daily trading volume accounts for nearly 35% of U.S. stock trading volume, equivalent to the daily turnover of the Shanghai and Shenzhen stock markets, with annual revenues around $7 billion. Related Read: "Earning Billions a Day, Why Is Citadel Securities So Profitable?"

Outside of Citadel Securities' market-making business, the main business that Citadel was built on is its hedge fund, managing $65 billion in assets. It is a tech-savvy player in the hedge fund world, focusing on investment value fundamentals while analyzing the market through extensive information and various mathematical models. It is said to invest billions of dollars annually in models and hardware.

According to LCH Investments data, in 2022, the top 20 hedge fund firms collectively generated $22.4 billion in profit (after fees), with Citadel ranking first with a profit of $16 billion in 2022, setting a new annual return record for hedge fund firms. The latest data this year shows that among all global hedge funds in terms of net income and valuation rankings since their inception, Citadel still ranks first, with Bridgewater Associates ranking fourth.

Data Source: LCH Investments

Citadel's founder Ken Griffin has a net worth of $45.9 billion, ranking 22nd on the Forbes 400 richest list and 31st globally. He even boldly stated, "We do indeed print money."

The CEO of Citadel Securities market-making business has a name that is very similar to the name of the richest person in the cryptocurrency world, Zhao Peng.

Compared to Citadel founder Ken Griffin's background, Zhao Peng's resume resonates more with every Asian: he entered a gifted children's program at the age of 10, got into Peking University's math department at 14, and then pursued a Ph.D. at the University of California, Berkeley.

In 2006, Zhao Peng joined Citadel and, with his outstanding mathematical talent, quickly stood out. By 2017, he took on the role of CEO, becoming one of founder Ken Griffin's most trusted individuals.

During Zhao Peng's four years as CEO, he multiplied Citadel Securities' trading net revenue fivefold, a growth rate that is almost unimaginable. Under his leadership, Citadel Securities not only gained a stronger foothold in the market but also took the company's profitability to unprecedented levels.

Zhao Peng's name has also suddenly become synonymous with the prodigy of the study abroad circle more than a decade ago. Related Read: "Citadel Securities CEO Zhao Peng: Wall Street Chinese Peak, Life Level Maxed Out at Ten"

According to the memories of study abroad students at that time, at an old Sichuan restaurant in Chinatown, the students were eating spicy hotpot while enthusiastically discussing Zhao Peng: "On the famous Lakeshore Drive in Chicago, he once bought two luxury apartments facing Lake Michigan and combined them, with a total value exceeding tens of millions of dollars." They all hoped to become the next Zhao Peng.

Citadel's "Trojan Horse" with Sequoia and Paradigm

Citadel entered the cryptocurrency world officially much later than its competitors, as Jane Street and Jump Trading had already started building their digital asset businesses in 2017 and 2021, respectively. It seems that due to regulatory issues, Citadel's connection to the crypto market has always been conducted "underwater."

In 2021, there was a very significant event in the crypto world. At a Sotheby's auction, a 1787 version of the U.S. Constitution was auctioned. At that time, 1,700 crypto players formed a decentralized organization called ConstitutionDAO, crowdfunding a total of 43 million dollars through social media to bid on this U.S. Constitution, leading to the creation of the PEOPLE token.

Unfortunately, they did not successfully acquire the constitution, and the final highest bidder was none other than Citadel's founder, Ken Griffin.

In 2022, this billionaire accepted the first external investment for Citadel Securities, completing a $1.15 billion financing at a valuation of $22 billion, with familiar faces from the crypto industry, Sequoia Capital, and Paradigm, leading the investment.

Sequoia Capital partner Junyi Lin will join Citadel Securities' board, and Paradigm's co-founder Matt Huang stated that they would work with Citadel Securities to expand their technology and expertise into more markets and asset classes, including crypto assets. Nevertheless, at that time, Griffin, to avoid regulatory issues, still claimed to the media that Citadel Securities had not yet entered the cryptocurrency trading space.

However, such a response clearly did not conceal the traces of Citadel's early layout. It was from that year onwards that Citadel officially began to dip its toes into the crypto industry, establishing a dedicated cryptocurrency business division.

It started with the mobilization of Citadel Securities' Global Head of Business Development, Jamil Nazarali, who became the CEO of Citadel's crypto business, partnering with another top market maker Virtu Financial, fund giant PIMCO, and Fidelity to start cryptocurrency trading and brokerage operations.

Then, in June 2023, they officially launched their jointly developed cryptocurrency exchange platform, EDX Markets, with Jamil Nazarali as the CEO. The platform focuses on "non-custodial" and "retail" trading, with trading limited to four assets: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.

In addition to Jamil Nazarali, Citadel has also nurtured many elites closely related to the crypto industry. For example, Brett Harrison, former President of FTX US who left due to management issues and conflicts with SBF, had also served as a technology lead at Citadel Securities, bringing a lot of technological innovation to the company.

However, Griffin himself has always had a somewhat contradictory attitude towards cryptocurrency. Initially, he publicly stated that he was cautious about cryptocurrency, believing they had no real value. Yet, in a recent interview, he admitted regret at not investing early in Bitcoin, saying that if he could see a clearer value, he might have bought into these assets earlier.

The reason Citadel Securities entered the crypto field is not as complicated as we might imagine. Politically "aligning" further deepened his connection to the crypto world. Trump's election as president, especially his support for the crypto industry, has already made many traditional financial giants, including Griffin, see the immense potential of crypto. Like most crypto industry whales, Griffin also staunchly supported the Republican Party during the 2024 election cycle. In the just-concluded election cycle, he was one of the top five Republican donors, second only to Elon Musk.

Citadel's Leap: From the Stock Market to the Crypto Space

Returning to the topic we discussed at the beginning of our article, why was that institutional asset allocation table holding "a $3.1 billion Ethereum short position" suspected to be from Citadel?

In addition to its recent involvement in the cryptocurrency industry, Citadel's name is always closely associated with "short selling." There are many rumors in the market about their short positions.

As early as during the stock market crash in 2015, there were rumors that foreign short-selling forces were one of the culprits behind the A-share market plunge. This was because at that time, the China Securities Regulatory Commission investigated many accounts and suspended a batch of trading accounts suspected of affecting securities trading prices or other investor investment decisions.

One of these seemingly insignificant companies was Sidue (Shanghai) Trading Co., Ltd. This Sidue company, as shown in the national enterprise credit information disclosure system, is a foreign-owned enterprise, with Citadel as its shareholder. After a five-year-long investigation and negotiation, Sidue finally agreed to pay $100 million to reach a settlement agreement with Chinese regulators. At that time, a well-known overseas financial blog, Zerohedge, revealed that Citadel had close ties to the Federal Reserve, often engaged in secret meetings, and was actually a tool for the Fed to control market stability. They used high-frequency trading and other means to boost the U.S. stock market.

Now, let's turn to 2021, when Robinhood halted retail trading during the GameStop (GME) stock frenzy, Citadel's name once again came into the spotlight amid numerous questions. Retail investors believed that Citadel, through its funding support to Robinhood, manipulated the showdown between retail investors and institutions. Although Ken Griffin denied these allegations during a congressional hearing, the close relationship between his company and Robinhood still left these accusations unsettled.

It's important to note that Citadel Securities is not just any market maker. Its relationship with Robinhood may seem like a customer-supplier relationship on the surface, but behind the scenes, Citadel provides Robinhood with a significant order flow. All of this was laid bare during the GameStop event. Due to Citadel paying Robinhood tens of millions of dollars to execute these trades, it naturally became the "hidden hand" in the minds of retail investors.

In fact, Citadel's years of short selling operations have long established it as a "behind-the-scenes operator" in the market.

Even in 2023, Terraform went as far as to sue Citadel for potentially being involved in a short selling operation against UST, ultimately leading to the UST derailing in May 2022, demanding that Citadel Securities provide some key trading numbers. Citadel vehemently denies any direct involvement in the UST collapse.

“No wonder the price action of GME is so similar to ETH,” as some community members pointed out that Citadel Securities plays a significant role in this, employing similar market-making strategies and tactics. Indeed, since July 2024, the price movement of ETH has closely mirrored that of GME.

Top chart: ETH Price Movement; Bottom chart: GME Price Movement

It's also not surprising that Citadel Securities has recently been suspected as one of the institutions shorting ETH.

However, as a top-tier hedge fund, it is possible for them to hold a significant amount of ETH spot while simultaneously shorting ETH for risk mitigation. From this perspective, perhaps this is not necessarily a bad thing, considering that their spot holdings are their main position, and the shorting is just a supplementary strategy aimed at safeguarding asset growth.

This also indirectly corroborates the widely circulated rumor of the "Great ETH Rehypothecation," where Wall Street giants are gradually accumulating positions to become the new crypto whales. The game and competition among crypto market makers are still ongoing.

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