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

Bitcoin cash (BCH), a cryptocurrency created by a hard fork of the Bitcoin blockchain in 2017, fell 20% last week, its biggest slide since April, according to data on TradingView and CoinDesk.

The sell-off happened as defunct exchange Mt. Gox said it would begin paying back creditors the roughly $9 billion worth of tokens taken in a 2014 hack. That includes $73 million worth of BCH, equating to 20% of the token's daily trading volume.

The resulting panic selling by BCH holders anticipating potential mass liquidations by the Mt. Gox creditors was amplified by poor liquidity, or order-book depth, across centralized exchanges, according to Paris-based Kaiko. In a market with poor liquidity, traders find it hard to execute large orders at stable prices, and a single large buy or sell order can disproportionately influence the asset's price, leading to a volatility explosion.

"Looking at BCH price slippage for a simulated $100k sell order, it reached its highest level in over a month on most exchanges, indicating worsening liquidity due to insufficient order book depth for large market orders," Kaiko said in a newsletter published Monday.

Slippage is the difference between the expected price of a trade and the actual price at which it is executed. A spike in slippage is representative of poor market liquidity and/or high volatility.

According to Kaiko, on July 5, the day Mt. Gox announced reimbursements, slippage in BCH markets listed on Bybit rose to 2.8% from 0.2% and on Itbit to 3.5% from 0.3%.

Poor liquidity has been a problem, particularly for alternative cryptocurrencies – that's everything other than BTC – since the FTX exchange and its sister concern, Alameda Research, went bankrupt in November 2022. Alameda was one of the biggest market makers, providing billions in liquidity in altcoins.

The poor liquidity "coincided with strong selling pressure related to the Mt. Gox repayments event, with the highest slippage increase observed on Itbit and Bybit," Kaiko said.

According to Jeff Dorman, chief investment officer at Arca, market makers have completely disappeared in a situation analogous to the 2009-10 credit markets.

"The fallout of Alameda/FTX in 2022 is still rippling through the market as market makers have exited the business, liquidity has dried up, and there are no intermediaries to help smooth out trading. And since liquid funds are not getting inflows, and retail has moved back to memecoins and equities, if someone has to sell a token, it just gets hammered.," Dorman explained in a LinkedIn post.