Implications of the collapse of the 20 billion AI fund: Why Bitcoin is Wall Street's preferred sell-off

According to Woofun AI, the sharp turmoil in the Situation Awareness Fund revealed Wall Street's asset disposal logic under an extreme liquidity crisis: when an additional security deposit notice is issued, the first thing to be liquidated is often not the source of loss, but the most liquid Bitcoin.

According to data compiled by Woofun AI, the root cause of this phenomenon is the amplification effect of the leverage mechanism on time mismatches. The fund has reached 20 billion US dollars, and its investment strategy focuses on infrastructure such as chips, electricity, storage devices, and data centers to support the prosperity of the AI industry. From the beginning of 2026 to June, the strategy showed remarkable explosive power, with a yield of 439%.

However, this high return comes with extremely high leverage risk. Take the simplified financial model as an example. If the initial capital of the fund is $100 and a total AI-related stock portfolio with a total value of 400 US dollars is built by borrowing 300 US dollars, once the stock price falls 10%, it will cause a loss of 40 US dollars. At this point, although the total remaining value of the portfolio was $360, after deducting $300 of debt, the original capital was only $60, and net assets fell by as much as 40%.

This type of nonlinear loss erupted in July, causing the fund's asset value to shrink by about 67%. In response to the crisis, Situation Awareness Fund was forced to sell most of the assets in its $16 billion public equity portfolio.

It is worth noting that this collapse did not stem from falsification of AI's long-term logic, but rather an inevitable result of short-term financing restrictions. Lenders and risk management departments are not concerned about whether the 2030 AI forecast will come true; they are only concerned about whether the fund can repay the loan next week. Therefore, even if the investment philosophy is correct, as long as financing capacity is exhausted due to price fluctuations, capital will be rapidly exhausted. Take the principal amount of $100 as an example. After experiencing 439% profit, it increased to $539, and then a 67% decline reduced it to about $178. Although the absolute value is still higher than the initial level, the collateral situation has seriously deteriorated because lenders assess risk by referring to current asset values rather than historical returns. This vulnerability is further exacerbated by differences in leverage ratios between different portfolios and the involvement of new clients' funds.

As the AI industry prospers, mortgage agreements such as loans, derivatives, corporate bonds, and private credit have surged, so the impact of falling stock prices can be transmitted to a wider range of markets through multiple paths. Additional margin requirements have completely changed the decision-making framework for portfolio managers: from seeking the highest future returns to finding assets that can be realized the fastest. Although privately held AI-related assets are extremely valuable, the sale process involves financial review, preparation of legal documents, and valuation negotiations, which takes a long time; large-scale sell-off of public stocks may cause further price drops, causing even greater losses. The Situation Awareness Fund avoided part of the risk of market shocks by transferring most of its public shares to Castle Investments.

However, for funds that lack a single buyer to take on multi-billion dollar assets, they must raise cash by selling multiple assets in a decentralized manner. In this context, Bitcoin has become the first choice due to its unique liquidity characteristics. The Bitcoin market continues to operate during Asian trading hours, weekends, and holidays. It has uniform global quotes, and is generally more liquid than private stocks or special credit assets.

Although funds may still be bullish on Bitcoin, the instantaneity of spot trading makes it an effective tool to address cash shortages. Brokers can't wait for long-term expectations of Bitcoin supply scarcity to be fulfilled; what they urgently need is readily available cash. As a result, rather than being sold off due to deteriorating fundamentals, Bitcoin fell victim to the liquidity crisis due to its “easiest to sell” attribute.

This cross-asset class liquidation transmission chain is particularly evident in specific scenarios. Assuming that a fund with heavy AI assets falls in chip stock prices at the end of this week, and the collateral value approaches the minimum requirement, the lender immediately increases the safety buffer amount and requires immediate cash payment. At this time, US stocks are in a non-trading period, private AI stocks will not be sold until Monday, corporate bond transactions need to be coordinated by multiple parties, and the Bitcoin spot market is open around the clock. Funds can quickly sell Bitcoin during the Asian trading session, which directly impacts investors who use leverage to trade cryptocurrencies. The exchange automatically closed positions due to insufficient collateral, triggering a chain sell-off, further depressing the price of Bitcoin. As a result, demand for cash generated by AI stocks evolved into a cryptographic clearing incident.

The process is similar to selling a car after a fire — the car is not the source of the fire, but it is the easiest way to raise money. Although transferring large amounts of assets to Castle Investment can reduce market pressure and prevent multi-billion dollar AI stocks from being sold off through regular trading and causing more additional margin requirements, it cannot eliminate systemic fragility. When four situations occur simultaneously, Bitcoin will face tremendous pressure: AI-related stocks continue to fall, lenders require more collateral, affected funds hold cryptocurrencies and are in urgent need of cash, and other assets cannot meet liquidity needs. The first signs may be that Bitcoin prices are falling in sync with AI stocks without exchange failures, regulatory actions, or network issues, especially during Asian trading sessions or weekends.

This correlation was first seen in the Bitcoin spot market, perpetual contract futures market, and other continuous trading markets. Even if the AI investment logic doesn't work, the leverage effect is enough to destroy investment portfolios before investors replenish collateral.

The core of market fragility lies in the resonance between liquidity mismatches and leverage cycles. The next sharp drop in Bitcoin's price may not be due to traditional risk events such as hacking attacks, government bans, or the collapse of cryptocurrency companies, but will be triggered by an AI investor selling the most easily monetized asset after receiving a bank call.

This mechanism, which is transmitted from traditional financial leverage pressure to the crypto market, reveals a new path of risk transmission across asset classes. When AI-related stock fluctuations trigger additional margin requirements, Bitcoin's high liquidity becomes its biggest weakness. Investors need to be wary of this non-fundamental-driven sell-off pressure, especially during windows where liquidity is relatively weak, such as during Asian trading sessions or weekends. The acceleration of crypto liquidation events often begins with small fluctuations in the spot market, then expands through the perpetual contract futures market, and eventually causes a systemic impact. Understanding this transmission chain is essential to anticipate market bottoms and avoid liquidity traps.