Mt Gox distributions may not be all doom and gloom for bitcoin

The Mt Gox distributions may cause more downward pressure on bitcoin cash than bitcoin, Galaxy says


Galaxy Digital head of firmwide research Alex Thorn | DAS 2022 New York by Blockworks


Movement of bitcoin from the known Mt Gox wallet to a new address earlier this week caused a bit of panic as investors wondered what was happening. 

Former CEO Mark Karpelès assured people that the move was made to prepare for distributions. The estate then put out a statement echoing Karpelès. None of this is out of the norm, as the trustee has to prepare for the distributions which have a deadline of Oct. 21. 

Obviously, the distributions have the potential to apply a lot of pressure on the market. It’s also a hotly discussed topic, with research firms like K33 saying that there’s the potential for downside as more creditors receive their distributions. 

Now the thing with Mt Gox is that it’s a lot murkier — for a few reasons — than some of the US bankruptcies we’ve talked about. 

Read more: Empire Newsletter: Could bitcoin take a hit from Mt Gox creditors?

It’s also the oldest crypto bankruptcy of the current bunch at 10 years old. The lack of clarity around the process comes from a few things: the overseas aspect, missing bitcoin, etc. 

As mentioned above, K33 said earlier this year that the payout could apply pressure to bitcoin. The movement earlier this week just served as a reminder that the overhang is nearing, K33 analysts wrote on Tuesday. 

Earlier this year, people on Reddit said that they began to receive emails from the estate asking them to confirm their account and identity details. The emails also added that distributions would be in-kind, lining up with the timeline established after some creditors were repaid in yen late last year. 

In-kind means that a creditor receives bitcoin or bitcoin cash, rather than fiat. 

“Today, the market indicated that it expects Bitcoin cash to underperform once the Mt. Gox floodgates are opened, as shorts piled into BCH perps shortly after wallets reactivated.”

But it might not be all doom and gloom once the distributions are made, depending on who you talk to. 

Galaxy Research’s Alex Thorn offered some clarity in a research note late Tuesday, noting that the creditors had options for their payouts and some could opt for earlier payouts that take a bit off the top to make it more timely. Those willing to be patient could opt to wait a bit longer and receive a larger payout at a later date. 

Thorn also believes that roughly 65,000 BTC/BCH will be returned to 20,000 individual creditors from late May to June, or even as late as September.  

Speaking to funds with large claims, Thorn said they’re “likely to distribute their BTC to LPs in-kind, and from speaking with several LPs in these funds, [he] does not believe there will be significant selling from this cohort.”

Overall, Thorn says the creditors he’s chatted with seem to be longer-term bitcoiners who wouldn’t be so willing to hit the sell button once the bitcoin is moved to their wallet. 

“Although it’s impossible to quantify, we believe the creditor base is comprised primarily of die-hard bitcoiners. Thousands of these creditors have waited 10 years for payouts and resisted compelling and aggressive claims’ offers during that time, suggesting they want their coins back,” he wrote.

But, we’re talking about billions of dollars in bitcoin here. The payout is tremendous and even 6,500 of the 65,000 bitcoin being sold could have a market impact. 

However, Galaxy’s report Tuesday notes that the firm believes the market “is anticipating much larger sell pressure on BTC than is likely to occur.”

Both Thorn and research firms like K33 can agree, however, that the repayments are going to weigh on bitcoin cash. 

“This massive payout is likely to impact the performance of both coins negatively,” K33 wrote Tuesday. “We argue that BCH is the single most exposed asset and an attractive pair hedge against Mt. Gox distributions.”

Thorn wrote that one of the big reasons BCH could face such an impact is due to the fact that creditors didn’t originally buy or own any BCH, given that it was created three years after the bankruptcy. 

The selling pressure may not be as intense if his thesis about the original bitcoiners holds, because the cohort “typically does have a higher rate of BCH sympathy than the market as a whole.” However, that won’t abate all of the pressure. 

K33 noted that there could be heavy shorting in BCH. “Notional open interest in BCH perps has ballooned by 9.1% following the Mt. Gox wallet consolidation today, alongside deeply negative funding rates,” analysts wrote. 

To echo that, Galaxy thinks that 90% of the distributed BCH would “eventually” be sold.

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