Markets
Bitcoin Cash (BCH) Sell-Off Led by Mt. Gox 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, the biggest drop since April, according to data from TradingView and CoinDesk.
The sell-off occurred when the stock market was inactive Mount Gox said would begin repaying creditors the roughly $9 billion in tokens taken in a 2014 hack. That includes $73 million of BCHequal to 20% of the daily trading volume of the token.
The resulting panic selling by BCH holders anticipating potential mass liquidations by Mt. Gox creditors was amplified by thin liquidity, or order book depth, among centralized exchanges, according to Paris-based Kaiko. In a thinly liquid market, traders find it difficult to execute large orders at stable prices, and a single large buy or sell order can disproportionately affect the asset’s price, leading to a burst of volatility.
“Looking at the BCH price slippage for a simulated sell order of $100,000, it has reached the highest level in over a month on most exchanges, indicating deteriorating liquidity due to insufficient order book depth for large market orders,” Kaiko said in a newsletter published on 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 indicative of poor market liquidity and/or high volatility.
According to Kaiko, on July 5, the day Mt. Gox announced the refunds, the 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 problemespecially for alternative cryptocurrencies, meaning everything but BTC, since the FTX exchange and its sister company, Alameda Research, went bankrupt in November 2022. Alameda was a major market maker, providing billions in altcoin liquidity.
The tight liquidity “coincided with strong selling pressure related to the Mt. Gox redemption event, with the highest increase in slippage observed on Itbit and Bybit,” Kaiko said.
According to Jeff Dorman, chief investment officer at Arca, market makers have completely disappeared, in a situation similar to what occurred in credit markets in 2009-2010.
“The fallout from Alameda/FTX in 2022 is still reverberating through the market as market makers have exited the business, liquidity has dried up, and there are no intermediaries to help smooth out trades. And since liquid funds are not receiving inflows and retail trading has reverted to memecoins and stocks, if someone has to sell a token, they simply get hammered,” Dorman explained in a statement. Posts on LinkedIn.