An exchange for cryptocurrency, which collapsed a decade ago after a cyber attack, is on the verge of giving back billions in the form of the token to users — and this has investors on edge.
In a short while, Tokyo-based bitcoin exchange Mt. Gox, which went bankrupt in 2014 due to a series of thefts resulting in the loss of 650,000 to 950,000 bitcoins (equivalent to over $59 billion at current rates), will initiate reimbursements to thousands of users amounting to nearly $9 billion worth of tokens.
The payment process has been prolonged through a complex bankruptcy procedure, including several postponements and legal disputes.
Struggling Mt. Gox creditors will receive their due starting early July, as announced by the court-appointed trustee managing the exchange’s insolvency proceedings, with repayments made using a combination of bitcoin and bitcoin cash, an early derivative of the original cryptocurrency.
While it’s a positive development for victims of the hack who have patiently awaited compensation, the value of bitcoin plummeted to $59,000 last week, marking the second most significant weekly decline of the year in the cryptocurrency market.
Potential Impact on Bitcoin
Experts have consulted half a dozen analysts to gather insights on the possible outcomes as approximately 141,000 bitcoins, roughly 0.7% of the total 19.7 million bitcoins in circulation, are returned to Mt. Gox victims this week.
As the disbursements approach, the pressure on bitcoin may intensify owing to the substantial influx of funds back into the market from Mt. Gox users.
Formerly known as “Magic: The Gathering Online Exchange,” Mt. Gox was once the dominant spot bitcoin exchange globally, responsible for about 80% of all global dollar trades involving bitcoin.
At the time of its closure in February 2014, bitcoin was valued at approximately $600 per coin. As of the latest update, the world’s leading cryptocurrency is trading at around $62,000 per coin, indicating a surge of over 10,000% in the last decade for users opting to be reimbursed in cryptocurrency instead of cash.
According to John Glover, the Chief Investment Officer at crypto lending firm Ledn, the windfall for Mt. Gox users is likely to result in extensive bitcoin sales as investors seek to capitalize on their profits.
Consumer Behavior and Market Response
James Butterfill, the Head of Research at CoinShares, highlighted concerns surrounding the looming release of nearly $9 billion in bitcoin from Mt. Gox, citing its potential impact on those holding bullish perspectives on bitcoin.
These impending sales could create a situation where cryptocurrency prices face additional downward pressure in July before rebounding starting from August, the analysts at JPMorgan opined.
It’s essential to note that similar instances of large fund redemptions locked up in centralized trading platforms have previously influenced bitcoin’s price movements.
Recent events, including the sale of 5,000 bitcoins by the German government and Gemini’s return of over $2 billion worth of bitcoin to users, have also been linked to downward pressure on bitcoin’s value.
Bitcoin and Market Outlook
Despite concerns over bitcoin’s recent price fluctuations, analysts believe that any potential sell-off prompted by the Mt. Gox repayments is anticipated to be short-lived.
Market liquidity is deemed sufficient to absorb any mass sell-offs, as the daily trading volume for bitcoin on trusted exchanges remains robust throughout the year, as noted by CoinShares’ Butterfill.
The market seems well-equipped to absorb the selling pressure, with many creditors likely opting for an early 10% deduction on their holdings to expedite repayment, alleviating the overall impact on price levels.
Macro Factors Influencing Bitcoin’s Performance
Bitcoin’s recent price fluctuations are not solely attributed to Mt. Gox repayments but are also influenced by a myriad of other factors.
The cryptocurrency witnessed a remarkable surge earlier in the year, surpassing $70,000 following the U.S. Securities and Exchange Commission’s approval of the first spot bitcoin ETF.
However, persistent concerns among investors, such as outflows from bitcoin ETFs and substantial market liquidations, coupled with broader macroeconomic issues, have led to price declines.
Cryptocurrencies, known for their volatility, are particularly responsive to changes in interest rates, as highlighted by CoinShares’ Butterfill in reference to the Federal Reserve’s updated rate forecasts impacting bitcoin’s price trajectory.
