Author: MacKenzie Sigalos, Ryan Browne, CNBC; Translated by: Deng Tong, Golden Finance
Summary
In a few days, bankrupt Tokyo-based bitcoin exchange Mt. Gox will begin repaying around $9 billion worth of tokens to thousands of its users.
More than a decade ago, the platform collapsed following a series of thefts, resulting in the loss of up to 950,000 Bitcoins.
While this is good news for victims who have been waiting for years for compensation, the price of Bitcoin fell to $59,000, the second-biggest weekly drop in the cryptocurrency market this year.
A bitcoin exchange that collapsed in a hack a decade ago is about to return billions of dollars worth of bitcoin to its users, worrying investors.
In a few days, bankrupt Tokyo-based bitcoin exchange Mt. Gox will begin repaying nearly $9 billion worth of tokens to thousands of its users. The platform collapsed in 2014 following a series of thefts that saw the loss of between 650,000 and 950,000 bitcoins, worth as much as $59 billion at current prices.
The payment comes after a lengthy bankruptcy process that involved multiple extensions and legal challenges.
On Monday, the court-appointed trustee overseeing the exchange’s bankruptcy proceedings said distributions to the company’s roughly 20,000 creditors would begin in early July. The payments will be made in a combination of bitcoin and bitcoin cash, an early fork of the original cryptocurrency.
While this is good news for the hack victims who have been waiting for years for compensation, the price of Bitcoin fell to $59,000 last week, marking the second-biggest weekly drop in the cryptocurrency market this year.
CNBC spoke to six analysts to ask for their thoughts on what will happen after about 141,000 bitcoins, or about 0.7% of the 19.7 million bitcoin supply, were returned to Mt. Gox victims this week.
Pressure on Bitcoin could intensify
Mt. Gox, short for “Magic: The Gathering Online Exchange,” was once the world’s largest spot Bitcoin exchange, claiming to handle about 80% of global Bitcoin-dollar transactions.
At the time of the shutdown in February 2014, Bitcoin was worth about $600.
As of Monday, the world’s largest cryptocurrency was trading at around $62,000 per coin. This means that users who have chosen to be compensated in kind — the cryptocurrency itself, rather than a cash equivalent — have seen the value of their tokens surge by more than 10,000% over the past decade.
John Glover, chief investment officer at crypto lending firm Ledn, noted that the windfall from Mt. Gox users could translate into a massive sell-off in Bitcoin as investors look to lock in gains.
“A lot of people will obviously cash out and enjoy the fact that their assets, which were trapped by the Mt. Gox bankruptcy, were the best investment they ever made,” said Glover, a former Barclays managing director. “Some will obviously choose to take their money and walk away,” Glover added.
James Butterfill, head of research at CoinShares, told CNBC that the overhang of nearly $9 billion in upcoming bitcoin issuance “has long been a concern for those who are bullish on bitcoin.”
"As a result, the market is highly sensitive to any related news. With the news that the trust will start selling in July, investors are understandably concerned," Butterfield said.
This is not the first time that Bitcoin has experienced volatility due to large-scale redemptions of funds locked in centralized exchanges.
Last month, cryptocurrency exchange Gemini returned more than $2 billion worth of Bitcoin to users whose funds were trapped in its Earn lending program. Since Gemini suspended Earn withdrawals on November 16, the price of Bitcoin has more than tripled and has now recovered 230%.
JPMorgan analysts linked this to the negative price action, saying in a research note last week that “it is reasonable to assume that some of Gemini’s creditors (primarily retail investors) have taken at least some profits in recent weeks.”
Analysts expect that Mt. Gox customers are also inclined to sell some of their bitcoins to profit from the cryptocurrency's huge gains.
“Assuming that the majority of liquidations of Mt. Gox creditors occurred in July, [this] would create a trajectory where cryptocurrency prices are further depressed in July but rebound starting in August,” they wrote.
Separately, last month the German government sold 5,000 of the 50,000 bitcoins tied to the movie piracy operation Movi2k (worth about $310 million at Monday’s prices).
According to blockchain intelligence firm Arkham Intelligence, the funds were sent to various cryptocurrency exchanges, including Coinbase, Kraken and Bitstamp.
Analysts say these cryptocurrency liquidations are also weighing on Bitcoin’s price.
Mt. Gox Customers Can Keep Their Bitcoins
Most analysts believe that Bitcoin’s losses are likely to be contained and short-lived.
“I think the sell-off concerns related to Mt. Gox are probably short-term,” said Lennix Lai, chief commercial officer at cryptocurrency exchange OKX.
"Many of Mt. Gox's early users, as well as its creditors, are long-term Bitcoin enthusiasts who are unlikely to sell all of their Bitcoin at once," he said, adding that previous sell-offs by law enforcement, including in the Silk Road case, did not result in a sustained, catastrophic drop in prices.
Butterfill said market liquidity is sufficient to cushion the blow of any potential large-scale market sell-off.
“This year, daily Bitcoin trading volume on trusted exchanges has remained at $8.74 billion, suggesting that liquidity was sufficient to absorb these sell-offs during the summer,” Butterfill said.
According to CCData research analyst Jacob Joseph, the market is well-positioned to absorb selling pressure.
“In addition, a large portion of creditors are likely to take a 10% write-down on their holdings to get repaid early, and not all holdings will be liquidated in the open market, thus alleviating overall selling pressure,” he said.
Joseph added that recent price action suggests the temporary impact of the Mt. Gox repayment may have already been priced in.
Alex Thorn, head of research at Galaxy Digital, believes that the amount of Bitcoin distributed will be less than people think, which means that the selling pressure will be lower than the market expects.
However, he also wrote in May that even if just 10% of the distributed Bitcoins were sold, “it would have an impact on the market.”
“Most individual creditors’ bitcoin will be deposited directly into an exchange’s trading account, which makes it very easy to sell,” Thorn said.
Vijay Ayyar, head of Asia-Pacific consumer growth at cryptocurrency exchange Gemini, said the overall impact of the Mt. Gox payments is likely to “dissipate” given the diverse recipients of the funds.
On the one hand, some individual holders will get their bitcoins immediately. Then, Ayyar said, a “significant amount” of bitcoin will be released to the claims fund.
“These funds then need to distribute these bitcoins to their LPs [limited partners], so the whole process may take a while, which will have a time impact on the price,” he told CNBC.
Macro resistance behind Bitcoin’s decline
It is worth noting that there are many other reasons behind Bitcoin’s recent decline.
The cryptocurrency staged a stunning rally earlier this year, with prices topping $70,000 after the U.S. Securities and Exchange Commission approved the first spot Bitcoin ETF.
But investors remain anxious amid outflows from bitcoin ETFs and large-scale market liquidations. The broader macro environment is also worrying investors.
Earlier this month, the Fed said it planned to cut interest rates just once this year, a smaller cut than in previous moves.
Cryptocurrencies are inherently volatile and are particularly sensitive to changes in the interest rate environment.
CoinShares’ Butterfill said the Federal Reserve’s new rate forecast is one of Bitcoin’s “likely culprits for recent price declines.”
Butterfill said that and other issues “will likely weigh on prices during the lower volume summer months.” However, “the fundamental investment case remains very much intact,” he added.
