Low Exchange Liquidity Triggered Bitcoin Cash Decline During Mt. Gox Creditors’ Liquidation: Kaiko

Bitcoin Cash (BCH) experienced a significant decline last week, dropping 20%, which represents its largest decrease since April.

This sell-off occurred following Mt. Gox’s announcement, the notorious exchange that was hacked in 2014, regarding its plans to start compensating creditors with the cryptocurrency assets it possesses.

Among these assets was around $73 million in BCH, which made up a considerable part of the token’s daily trading activity.

Poor Liquidity Intensified BCH Sell-Off

Market analysts, including those from Paris-based Kaiko, pointed out that the sell-off was worsened by ongoing challenges related to poor liquidity on centralized exchanges.

Liquidity, defined as the ability to execute large trades without significantly impacting an asset’s price, was notably deficient.

Kaiko observed that in a market characterized by insufficient liquidity, even small buy or sell orders can trigger disproportionately large price fluctuations, increasing volatility.

Kaiko’s findings also indicated that slippage, or the variance between expected and actual trade execution prices, rose sharply on July 5th, coinciding with Mt. Gox’s announcement.

On exchanges like Bybit and Itbit, slippage for BCH escalated from mere fractions of a percent to as much as 3.5%, highlighting the effects of reduced liquidity on market stability.

The liquidity issue has been further aggravated by recent events in the cryptocurrency market.

The downfall of FTX and its associated market maker, Alameda Research, in late 2022 significantly diminished liquidity support for alternative cryptocurrencies such as BCH.

This decline created a gap in the market, with fewer participants available to ensure smooth trading and stabilize prices during times of increased volatility.

Jeff Dorman, Chief Investment Officer at Arca, compared the current liquidity challenges to the disruptions experienced in traditional financial markets during the credit crunch of 2009-10.

In a recent post on LinkedIn, he remarked that the departure of major market makers from the cryptocurrency sector has had a lasting effect, leading to heightened susceptibility to sharp price changes triggered by external factors, such as Mt. Gox’s creditor reimbursements.

“With insufficient market makers and retail investors gravitating towards more speculative assets like memecoins and equities, the cryptocurrency market lacks the essential buffers to absorb selling pressures,” Dorman stated.

Investors Take Advantage of Buying Opportunity

Although Bitcoin has faced selling pressure from various fronts, analysts suggest that investors view this selling as a favorable entry point.

CoinShares, an investment firm, reported total inflows of $441 million into digital asset investment products for the week.

However, trading volumes in exchange-traded products remained relatively low at $7.9 billion, consistent with typical trends observed during the summer months.

Historically, July has been a positive month for the crypto market, with a median return of 9%. Many traders expect this trend to persist.

Additionally, over the last two trading sessions, US Bitcoin ETFs have seen a net inflow of $438 million.

In another piece of encouraging news that further enhanced sentiment in the crypto market, a German government entity recently recovered over $200 million worth of Bitcoin from various exchanges.

The post Poor Liquidity on Exchanges Spurred Bitcoin Cash Sell-Off Amid Mt. Gox Creditors’ Liquidations: Kaiko appeared first on Cryptonews.