Since the beginning of the cryptocurrency bear market in December, people have come up with various theories to explain the downturn. Those include Wall Street manipulation of futures contracts, Chinese New Year correction, and reallocation of capital into equities. But on March 7, the crypto community caught a glimpse of most likely the real reason: mass selling by the Mt. Gox bankruptcy trustee.
Newly published documents show that Japanese attorney Nobuaki Kobayashi sold about 35,841 Bitcoin (BTC) and 34,000 Bitcoin Cash (BCH) worth ¥43 million, or $405 million, between September and February. The release of information greatly spooked investors and traders, pummeling BTC price down over 10% to $8370, ETH to $641.60, and LTC to $157.27 on March 9 on the Coinbase/GDAX exchange. Altcoins, tethered to BTC and ETH, fell particularly hard. The startling revelations answer some questions but raise more concerns about the future outlook of BTC and cryptocurrency.
Mt. Gox, once the world’s largest BTC exchange, announced that it had suffered an alleged hack in February 2014. Mt. Gox then filed for bankruptcy protection in Japan and the US. CEO Mark Karpeles claimed that about 850,000 BTC were stolen from Mt. Gox’s wallets. Subsequently, BTC entered a multiyear bear market and lost over 80% of its price. Karpeles was later arrested by Japanese police for fraud, embezzlement, and market manipulation. The court-appointed trustee was delegated the task of recovering lost funds and making creditors whole in Japanese yen. Therefore the trustee sold BTC and BCH for yen last year and stated he would consult with the court regarding further sales to repay creditors.
The reason the trustee’s sales essentially crashed the markets was the method of liquidation. The trustee transferred large quantities of BTC and BCH from cold storage to the Kraken exchange on December 18 and 22, January 17 and 31, and February 5. The trustee sold with market orders on the Kraken exchange, eating up liquidity and limit buy orders immensely on the way down. Each sell order reduced the price of BTC and BCH and spooked traders into triggering stop losses and panic selling.
The crypto community largely criticized the trustee’s method of selling. By placing large market orders on a single exchange, the trustee dried up liquidity and moved the market with enormous bearish pressure. Had he opted to sell over-the-counter (OTC), a service provided by exchanges for large institutional trading, the markets would not have been moved so much. Or he could have sold in a public auction, like the US government conducted with BTC seized from the illicit marketplace Silk Road. Either option would have resulted in the trustee receiving better yen prices for his sales and avoided destabilization of the crypto markets.
The news probably contributed to more selling pressure because investors realized that the trustee still holds around 166,000 BTC and might sell more later. Psychology suggests that some sold for fear of the trustee dumping, and others sold in anticipation of buying back at lower prices. Some investors likely woke up in the morning to the news and panic sold as they saw a correction.
The major cryptos have recovered a bit from the bottom. BTC is retesting the $9500 level. New investors are right to be cautious as the Mt. Gox aftermath plays out. They can keep track of the trustee’s remaining funds on the blockchain. Hopefully an OTC trading institution will approach Kobayashi should he attempt to sell more. On the bright side, the market absorbed and bounced back from the last dump. And it is good that ownership is less concentrated and more decentralized now.
Please leave a comment below to share and discuss your thoughts on the actions by the Mt. Gox trustee.