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Bitcoin Cash’s Mt. Gox-Led Sell-Off Is Amplified by Poor Liquidity

Jul 8, 2024
    BCH fell 20% last week, its biggest loss in three months, as Mt. Gox announced creditor repayments.Slippage surged across centralized exchanges, signaling poor liquidity as prices fell.
As an experienced financial analyst, I believe that the recent 20% drop in Bitcoin Cash (BCH) last week was not only due to Mt. Gox’s creditor repayments announcement but also because of the poor liquidity across centralized exchanges. The panic selling by BCH holders, who anticipated potential mass liquidations by Mt. Gox creditors, worsened when traders found it hard to execute large orders at stable prices due to insufficient order book depth for large market orders.Bitcoin Cash (BCH), which emerged as a separate digital currency following a split in the Bitcoin blockchain in 2017, experienced a significant drop of approximately 20% over the past week, marking its most substantial decline since April, based on information from TradingView and CoinDesk.

As an analyst, I would rephrase it as follows: The announced payback by defunct cryptocurrency exchange Mt. Gox initiated a sell-off, with approximately $9 billion in tokens being returned to creditors. This sum includes around $73 million worth of Bitcoin Cash, which represents roughly 20% of the token’s daily trading volume.

BCH holders on edge from the threat of mass liquidations by Mt. Gox creditors sold off their tokens in a frenzy, intensified by insufficient buying and selling activity on centralized exchanges, as reported by Kaiko based in Paris. In illiquid markets, it becomes challenging for traders to execute significant transactions without causing substantial price fluctuations, making the asset’s value vulnerable to wild swings.
In my analysis of recent Bitcoins Cash (BCH) price movements, I discovered that a hypothetical $100k sell order caused the largest slippage – price difference between the expected and executed price – observed in over a month on various exchanges. This significant price discrepancy suggests that the order book depth for large market transactions has been insufficient, signaling deteriorating liquidity within the BCH market.
Bitcoin Cash's Mt. Gox-Led Sell-Off Is Amplified by Poor Liquidity

The gap between the anticipated price for a transaction and the final price it gets executed at is referred to as slippage. An elevated level of slippage indicates inadequate market fluidity and/or heightened market volatility.

Based on Kaiko’s report, the discrepancy between buy and sell prices for Bitcoin Cash (BCH) significantly increased on July 5, the day Mt. Gox announced reimbursements. The spread rose to 2.8% on Bybit from its initial 0.2%, while it climbed up to 3.5% on Itbit from a previous 0.3%.

As a crypto investor, I’ve noticed that poor liquidity has been a significant challenge, especially for alternative cryptocurrencies, ever since FTX exchange and its affiliated firm Alameda Research faced bankruptcy in November 2022. Alameda was a leading market maker, supplying billions in liquidity to altcoins. Consequently, the absence of their presence has left many investors scrambling for other sources or dealing with larger spreads between buy and sell prices.

As a crypto investor, I’ve noticed that during the Mt. Gox repayment event, the poor liquidity in the market coincided with significant selling pressure. The exchanges Itbit and Bybit experienced the most pronounced slippage increases. In simpler terms, it was tough to buy or sell cryptocurrencies at the desired price due to a lack of available funds in the market, leading to larger than usual price differences between buy and sell orders on these specific platforms.

Based on Jeff Dorman’s perspective as the chief investment officer at Arca, the role of market makers has vanished in a scenario reminiscent of the 2009-10 credit market crisis.

As a researcher studying the cryptocurrency market, I’ve observed that the aftereffects of the Alameda/FTX incident in 2022 continue to make waves. Market makers have departed from the scene, leaving a dearth of liquidity in its wake. Intermediaries are absent, making it difficult for trading to be facilitated smoothly. Consequently, if someone needs to sell a token, the price takes a significant hit due to the lack of inflows into liquid funds and the shift of retail investors towards memecoins and equities.

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2024-07-09 13:58