Bitcoin Cash Experiences Heightened Sell-Off Due to Mt. Gox Influence and Low Liquidity

Bitcoin Cash (BCH) experienced a significant downturn last week, dropping by 20%, marking its most substantial decline in three months. This decline coincided with an announcement from Mt. Gox regarding the repayment of creditors, following a hack in 2014 that saw approximately $9 billion worth of tokens stolen. Among these tokens were $73 million worth of BCH, representing 20% of the token’s daily trading volume.

The sell-off of BCH was further exacerbated by concerns among holders about potential mass liquidations by Mt. Gox creditors. This panic selling was amplified by poor liquidity on centralized exchanges, as noted by Paris-based Kaiko. In a market with inadequate liquidity, executing large orders at stable prices becomes challenging, and a single significant buy or sell order can disproportionately impact the asset’s price, leading to increased volatility.

Kaiko highlighted the spike in BCH price slippage, indicating worsening liquidity due to insufficient order book depth for large market orders. Slippage, the variance between the expected and actual trade execution prices, is a key indicator of market liquidity and volatility. On the day Mt. Gox announced reimbursements, slippage in BCH markets listed on Bybit surged to 2.8% from 0.2%, and on Itbit, it rose to 3.5% from 0.3%.

The issue of poor liquidity has been a persistent challenge, particularly for alternative cryptocurrencies, since the bankruptcy of FTX exchange and Alameda Research in November 2022. Alameda Research played a significant role as a market maker, providing substantial liquidity in altcoins. The absence of market makers has created a liquidity vacuum, akin to the situation in the credit markets during 2009-10, according to Jeff Dorman, chief investment officer at Arca.

Dorman highlighted the ongoing repercussions of the Alameda/FTX fallout, emphasizing the lack of intermediaries to facilitate trading and mitigate price fluctuations. With retail investors shifting focus to meme coins and equities, the liquidity crunch has intensified, leading to heightened selling pressure and price volatility. The impact of these liquidity challenges continues to reverberate across the cryptocurrency market, underscoring the critical role of market makers in maintaining stability and liquidity.

In conclusion, the recent downturn in Bitcoin Cash, driven by concerns over Mt. Gox repayments and exacerbated by liquidity issues, underscores the importance of robust market infrastructure and liquidity providers in ensuring market stability and resilience in the face of external shocks.