A Bitcoin exchange that folded a decade ago due to a hacking incident is about to return billions in tokens to its users, causing investor concern.
In the coming days, the defunct Tokyo-based Bitcoin exchange Mt. Gox will start distributing nearly $9 billion worth of tokens to thousands of users. The platform collapsed in 2014 after losing between 650,000 and 950,000 bitcoins, worth over $59 billion at today’s prices, due to a series of heists.
This payout comes after a lengthy bankruptcy process marked by multiple delays and legal hurdles.
On Monday, the court-appointed trustee overseeing the bankruptcy announced that distributions to Mt. Gox’s approximately 20,000 creditors would begin in early July. The payouts will consist of Bitcoin and Bitcoin Cash, an early derivative of the original cryptocurrency.
While this is positive news for the hack victims who have waited years for compensation, Bitcoin’s price dropped to $59,000 last week, marking the second-worst weekly decline for the cryptocurrency this year. CNBC interviewed six analysts to gauge expectations as 141,000 bitcoins—about 0.7% of the total 19.7 million bitcoins in circulation—are returned to Mt. Gox victims this week.
Potential Pressure on Bitcoin
Mt. Gox, which stands for “Magic: The Gathering Online Exchange,” was once the world’s largest spot Bitcoin exchange, handling about 80% of global dollar trades for Bitcoin.
When it shut down in February 2014, Bitcoin was worth around $600. As of Monday, Bitcoin trades at about $62,000 per coin. This means that users opting for reimbursement in cryptocurrency, rather than cash, have seen their coins’ value soar over 10,000% in the past decade.
John Glover, chief investment officer at crypto lending firm Ledn, told CNBC that the windfall for Mt. Gox users would likely lead to significant Bitcoin sales as investors look to cash in on their gains. “Many will clearly cash out and enjoy the fact that having their assets stuck in the Mt. Gox bankruptcy was the best investment they ever made,” said Glover, a former managing director at Barclays. “Some will clearly choose to take the money and run.”
James Butterfill, head of research at CoinShares, told CNBC that the impending release of nearly $9 billion worth of Bitcoin has “long been a concern for those with bullish views on Bitcoin.” The market is highly sensitive to any related news, and the announcement that the trustee will begin selling in July has understandably worried investors.
It’s not the first time Bitcoin has reacted to large fund redemptions from centralized trading platforms. Last month, crypto exchange Gemini returned over $2 billion worth of Bitcoin to users from its Earn lending program, marking a 230% recovery since suspending withdrawals in November. JPMorgan analysts linked this to negative price action, suggesting that some Gemini creditors, mainly retail customers, have taken partial profits recently.
The analysts expect similar behavior from Mt. Gox customers, predicting that liquidations will pressure crypto prices in July, but the market might rebound from August onwards.
Last month, the German government sold 5,000 bitcoins—worth approximately $310 million at current prices—seized in connection with a movie piracy operation. Analysts say these liquidations also pressured Bitcoin’s price.
Analysts Predict Limited Sell-Off
Most analysts agree that any Bitcoin losses due to the Mt. Gox repayments will be contained and short-lived. Lennix Lai, chief commercial officer at crypto exchange OKX, believes the sell-off concerns are likely to be temporary. Many of Mt. Gox’s early users and creditors are long-term Bitcoin enthusiasts who are unlikely to sell all their Bitcoin immediately, he said, noting that previous law enforcement sell-offs did not result in sustained catastrophic price drops.
Butterfill suggested that the market has enough liquidity to cushion any mass sell-off. Bitcoin has maintained a daily trading volume of $8.74 billion on trusted exchanges this year, indicating sufficient liquidity to absorb these sales over the summer.
CCData research analyst Jacob Joseph believes the markets can handle the selling pressure. He noted that many creditors might take a 10% haircut on their holdings to receive early repayment, and not all holdings are set to be liquidated on the open market, reducing overall selling pressure. Recent price moves suggest that the impact of the Mt. Gox repayments might already be priced in.
Galaxy Digital’s head of research, Alex Thorn, believes fewer coins will be distributed than expected, resulting in less selling pressure. However, he wrote in May that even if only 10% of the distributed Bitcoin is sold, it will impact the market. Most individual creditors will have their coins deposited directly into a trading account at an exchange, making it easy to sell.
Vijay Ayyar, head of consumer growth for Asia-Pacific at crypto exchange Gemini, said the overall impact of the Mt. Gox disbursement is likely to be “dissipated,” given the varied recipients. Individual holders will get their Bitcoin immediately, while a significant amount of Bitcoin will be disbursed to claims funds, which then need to distribute these to their limited partners, adding a time element to the price impact.
Broader Macro Factors
There are other factors behind Bitcoin’s recent declines. The cryptocurrency surged past $70,000 earlier this year following the U.S. Securities and Exchange Commission’s approval of the first spot Bitcoin ETF. However, investor anxiety persists due to outflows from Bitcoin ETFs and significant market liquidations.
The broader macro environment also worries investors. Earlier this month, the Federal Reserve indicated plans to cut rates only once this year, down from multiple reductions previously suggested. Cryptocurrencies, inherently volatile, are particularly sensitive to changes in interest rates.
Butterfill said the Fed’s revised rate forecast is among the “likely culprits for the recent price decline” in Bitcoin. This, along with other issues, is likely to weigh on prices during the lower volume summer months, although “the fundamental investment case remains very much intact,” he added.