Author: MacKenzie Sigalos, Ryan Browne, CNBC; Translator: Deng Tong, Golden Finance
Summary
In a few days, bankrupt Tokyo-based bitcoin exchange Mt. Gox will begin repaying around $9 billion worth of tokens to thousands of users.
More than a decade ago, the platform collapsed in a series of thefts that saw the loss of up to 950,000 bitcoins.
While this is good news for victims who have been waiting for years for compensation, the price of bitcoin fell to $59,000, the second-largest weekly drop in the cryptocurrency market this year.
A bitcoin exchange that collapsed after a hack a decade ago is about to return billions of dollars worth of bitcoin to users, which has investors worried.
In a few days, bankrupt Tokyo-based bitcoin exchange Mt. Gox will begin repaying nearly $9 billion worth of tokens to thousands of users. The platform collapsed in 2014 following a series of thefts that saw the loss of between 650,000 and 950,000 bitcoins, worth as much as $59 billion at current prices.
The payments come after a lengthy bankruptcy process that involved multiple extensions and legal challenges.
On Monday, the court-appointed trustee overseeing the exchange's bankruptcy proceedings said distributions to the company's roughly 20,000 creditors would begin in early July. The payments will be made in a combination of bitcoin and bitcoin cash, an early offshoot of the original cryptocurrency.
While this is good news for victims of the hack who have been waiting for years for compensation, the price of bitcoin fell to $59,000 last week, posting the second-biggest weekly drop in the cryptocurrency market this year.
CNBC asked six analysts for their thoughts on what will happen after about 141,000 bitcoins, or about 0.7% of the total 19.7 million bitcoins, were returned to Mt. Gox victims this week.
The pressure on bitcoin could intensify
Mt. Gox, short for Magic: The Gathering Online Exchange, was once the world's largest spot bitcoin exchange, claiming to handle about 80% of bitcoin-dollar transactions worldwide.
When it shut down in February 2014, a bitcoin was worth about $600.
As of Monday, the world's largest cryptocurrency was trading at about $62,000 apiece. That means users who chose to be compensated in kind -- the cryptocurrency itself, rather than a cash equivalent -- have seen the value of their tokens surge more than 10,000% over the past decade.
John Glover, chief investment officer at crypto lending firm Ledn, noted that the windfall for Mt. Gox users could translate into a massive sell-off in Bitcoin as investors look to lock in gains.
“A lot of people will obviously cash out and enjoy the fact that their assets, which were trapped by the Mt. Gox bankruptcy, were the best investment they ever made,” said Glover, a former managing director at Barclays. “Some will obviously choose to take the money and walk away,” Glover added.
The overhang of nearly $9 billion in upcoming Bitcoin issuance "has long been a concern for those who are bullish on Bitcoin," James Butterfill, head of research at CoinShares, told CNBC.
"As a result, the market is highly sensitive to any news related to this. With the news that the trust will begin selling in July, investors are understandably concerned," Butterfill said.
This isn't the first time Bitcoin has seen volatility due to large-scale redemptions of funds locked up in centralized exchanges.
Last month, cryptocurrency exchange Gemini returned more than $2 billion worth of Bitcoin to users whose funds were trapped in its Earn lending program, and the price of Bitcoin has more than tripled since Gemini suspended Earn withdrawals on Nov. 16, recovering 230%.
Analysts at JPMorgan Chase & Co. tied this to negative price action, saying in a research note last week that “it is reasonable to assume that some of Gemini’s creditors (mostly retail investors) have taken at least partial profits in recent weeks.”
Analysts expect Mt. Gox customers to similarly sell some of their bitcoins to profit from the cryptocurrency’s massive gains.
“Assuming that the bulk of liquidations of Mt. Gox creditors occurred in July, [this] sets up a trajectory where cryptocurrency prices come under further pressure in July but rebound from August,” they wrote.
Separately, last month the German government sold 5,000 of the 50,000 bitcoins tied to the movie piracy operation Movi2k (worth about $310 million at Monday’s prices).
The funds were sent to various cryptocurrency exchanges, including Coinbase, Kraken and Bitstamp, according to blockchain intelligence firm Arkham Intelligence.
The cryptocurrency liquidations also weighed on bitcoin’s price, analysts said.
Mt. Gox customers expected to keep their bitcoin
Most analysts believe bitcoin’s losses are likely to be contained and short-lived.
“I think the sell-off concerns related to Mt. Gox are likely to be short-term,” said Lennix Lai, chief commercial officer at cryptocurrency exchange OKX.
“Many of Mt. Gox’s early users, as well as its creditors, are long-term bitcoiners who are unlikely to sell all of their bitcoins at once,” he said, adding that previous sell-offs by law enforcement, including in the Silk Road case, did not result in catastrophic and sustained price declines.
Butterfill said market liquidity is sufficient to cushion the blow of any potential large-scale market sell-off.
“This year, daily trading volume of bitcoin on trusted exchanges has remained at $8.74 billion, suggesting that liquidity was sufficient to absorb these sell-offs over the summer,” Butterfill said.
According to Jacob Joseph, a research analyst at CCData, the market is well positioned to absorb the selling pressure.
“In addition, a large portion of creditors are likely to take a 10% haircut on their holdings to get repaid early, and not all holdings will be liquidated on the open market, reducing overall selling pressure,” he said.
Joseph added that recent price action suggests that the temporary impact of the Mt. Gox repayments may have been priced in.
Alex Thorn, head of research at Galaxy Digital, believes that the number of bitcoins distributed will be smaller than people think, which means that selling pressure will be lower than the market expects.
However, he also wrote in May that even if only 10% of the distributed bitcoins were sold, “it would have an impact on the market.”
“Most individual creditors’ bitcoins will be deposited directly into trading accounts on exchanges, making it very easy to sell,” Thorn said.
Vijay Ayyar, head of consumer growth for Asia Pacific at cryptocurrency exchange Gemini, said the overall impact of the Mt. Gox payouts could be "dissipated" given the variety of recipients of the funds.
On one hand, there are individual holders who will get their bitcoins immediately. Then, Ayyar said, there will be a "substantial" amount of bitcoins being released to claims funds.
"These funds will then need to distribute these bitcoins to their LPs [limited partners], so the whole process may take a while, which will have a time impact on the price," he told CNBC.
Macro resistance behind bitcoin's decline
It's worth noting that there are many other reasons behind bitcoin's recent decline.
The cryptocurrency staged a stunning rally earlier this year, with prices topping $70,000 after the U.S. Securities and Exchange Commission approved the first spot bitcoin ETF.
But investors remain anxious amid outflows from bitcoin ETFs and massive market liquidations. The broader macro environment is also worrying investors.
Earlier this month, the Federal Reserve said it planned to cut interest rates just once this year, less than the multiple cuts it has made in the past.
Cryptocurrencies are inherently volatile and particularly sensitive to changes in the interest rate environment.
CoinShares’ Butterfill said the Fed’s new rate forecast is one of the “likely culprits for the recent price decline” for bitcoin.
That and other issues “will likely weigh on prices during the lower volume summer months,” Butterfill said. However, “the fundamental investment case remains very much intact,” he added.
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