Poor Liquidity on Exchanges Spurred Bitcoin Cash Sell-Off Amid Mt. Gox Creditors’ Liquidations: Kaiko

Bitcoin Cash (BCH) faced a substantial downturn last week, plunging 20%, marking its steepest decline since April.

The sell-off came after Mt. Gox, the infamous exchange that suffered a major hack in 2014, revealed intentions to begin reimbursing creditors with the cryptocurrency assets it held.

Among these assets was approximately $73 million worth of BCH, constituting a significant portion of the token’s daily trading volume.

Poor Liquidity Exacerbated BCH Sell-Off

Market observers, including Paris-based Kaiko, highlighted that the sell-off was exacerbated by prevailing issues of poor liquidity across centralized exchanges.

Liquidity, which refers to the ease of executing large trades without significantly affecting an asset’s price, was severely lacking.

Kaiko noted that in a market with inadequate liquidity, even modest-sized buy or sell orders can lead to disproportionately large price swings, intensifying volatility.

Kaiko’s analysis further revealed that the slippage, or the difference between the expected and actual execution prices of trades, spiked notably on July 5th, coinciding with Mt. Gox’s announcement.

On platforms such as Bybit and Itbit, slippage for BCH surged from fractions of a percent to as high as 3.5%, underscoring the impact of diminished liquidity on market stability.

The issue of liquidity has been exacerbated by recent developments in the cryptocurrency market.

The collapse of FTX and its affiliated market maker, Alameda Research, in late 2022 significantly reduced liquidity provision for alternative cryptocurrencies like BCH.

This reduction left a void in the market, with fewer entities capable of facilitating smooth trading operations and stabilizing prices during periods of heightened volatility.

Jeff Dorman, Chief Investment Officer at Arca, likened the current liquidity crisis to disruptions seen in traditional financial markets during the 2009-10 credit crunch.

In a recent LinkedIn post, he noted that the exit of major market makers from the cryptocurrency space has left a lasting impact, resulting in increased vulnerability to sharp price movements driven by external events, such as Mt. Gox’s creditor reimbursements.

“In the absence of adequate market makers and with retail investors flocking to more speculative assets like memecoins and equities, the cryptocurrency market lacks the necessary buffers to absorb selling pressures,” Dorman explained.

Investors Seize Buying Opportunity

While Bitcoin has been under selling pressure from various sources, analysts speculate that investors perceive this selling pressure as an attractive 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, which aligns with typical patterns observed during the summer.

Historically, July has been a bullish month for the crypto market, with a median return of 9%. Many traders anticipate this trend to continue.

Furthermore, over the past two trading sessions, US Bitcoin ETFs have experienced a net inflow of $438 million.

In another positive news that further boosted sentiment in the crypto market, a German government entity recently received over $200 million worth of Bitcoin back from various exchanges.