A recent report from Kaiko Research has raised concerns in the crypto market regarding the potential impact of the ongoing Mt. Gox bankruptcy case.
The report highlights that the infamous exchange still holds 46,000 BTC (valued at approximately $2.72 billion), which must be returned to creditors over the next year. This redistribution is being viewed as a significant factor that could contribute to market instability and pressure in the coming months.
Measuring Liquidity in the Crypto Market
Kaiko’s analysis examines trading volume, market depth, and price slippage to delve into the complexity of cryptocurrency liquidity. Through these measurements, traders and analysts can gain a better understanding of the entire liquidity profile of Bitcoin and other assets.
The chart below shows bitcoin’s 1% market depth before and after the FTX collapse, averaged across all cryptocurrency exchanges listing bitcoin. Interestingly, the report found that depth across exchanges rose in the months leading up to the collapse, but this does not necessarily imply that everything was functioning well at the time.
According to the paper, liquidity encompasses not only the volume of trades on exchanges but also the depth of the market and price swings during significant transactions. The way these elements interact becomes critical, particularly when substantial quantities of assets, like those from Mt. Gox, re-enter the market.
Since May 2024, there have been special tensions over the possible forced sale of cryptocurrency from bankrupt estates, like as Mt. Gox. According to Kaiko, there’s a chance that this redistribution will cause market reactions akin to those seen in past sell-offs. One such instance was when Mt. Gox returned the first batch of 100,000 BTC to creditors, causing a spike in selling pressure.
Impact of Large Holders on Market Stability
The Kaiko research identifies several significant Bitcoin holders outside the Mt. Gox estate who may have an additional impact on market stability. These include governments from the UK, China, and Ukraine, as well as the United States, which is the owner of more than 200,000 Bitcoin. Selling pressure might come from corporations like Tesla, which hasn’t traded Bitcoin since 2022.
However, the report stated that, since many holders want to keep their money, not all redistributed Bitcoin is probably going to be auctioned off right away. Nevertheless, past events have shown that sudden influxes of liquidated BTC tend to lead to market turbulence.
Can Positive Trade Volumes Save the Day?
Despite the potential risks, the Kaiko report highlights improvements in the overall liquidity of the crypto market since the collapse of FTX. With the launch of Bitcoin ETFs, daily trading volumes on the top ten cryptocurrency exchanges increased by 30%. With an average daily volume of $19 billion, Binance continues to top the market, followed by Bybit and Coinbase.
However, trade volume by itself isn’t necessarily a trustworthy measure of liquidity. Market depth, which gives a more accurate view of how well an exchange can manage big deals without experiencing a lot of price slippage, is something Kaiko emphasises as being very important. According to the analysis, market depth increased on all exchanges before the FTX collapse but declined precipitously thereafter, indicating the market’s fragility.
A notable example occurred in early August 2024, when BTC prices dropped by 20%, briefly dipping below $50,000 for the first time since February. The market turmoil during this period highlighted how crucial liquidity management is in volatile times.
The Path Ahead for Market Liquidity
The ongoing repayments from Mt. Gox and other significant liquidations will continue to be a focus for traders and observers as the cryptocurrency market develops.
Even if the market’s liquidity has increased following the fall of FTX, the Kaiko research indicates that there are still issues, particularly when volatility is high. Although new offerings such as ETFs for Bitcoin and Ethereum have sped up gains in liquidity, there is still a chance of substantial selling pressure.
In the end, comprehending the possible effects of significant liquidations necessitates a sophisticated strategy that considers a variety of liquidity indicators. This comprehensive perspective will be essential in reducing tensions and managing possible hazards presented by significant investors such as the Mt. Gox estate as the market develops.