Bitcoin Cash (BCH), created in 2017 through a hard fork of the Bitcoin Blockchain, faced significant turmoil last week following Mt. Gox’s announcement to repay creditors. The repayment plan, which addresses a 2014 hack, involves approximately $9 billion worth of stolen tokens, including $73 million in BCH. This announcement triggered a 20% drop in BCH value, marking the steepest decline since April.
Why Is BCH Under Threat?
The anticipation of potential liquidations by Mt. Gox creditors has led to panic selling among BCH holders, exacerbating weak liquidity conditions on centralized exchanges. According to data from Paris-based Kaiko, the market‘s weak order book depth is causing significant volatility, as large orders become difficult to execute at fixed prices.
Kaiko’s analysis revealed that a simulated $100,000 sell order on centralized exchanges resulted in the highest BCH bid-ask spread in over a month. This indicates that large market orders are further deteriorating liquidity due to insufficient order depth, intensifying price fluctuations.
How Do Market Makers Influence Liquidity?
The decline in market makers who provide liquidity in crypto markets poses a critical issue, particularly for alternative cryptocurrencies like BCH. The bankruptcy of Alameda Research and FTX in November 2022 prompted liquidity providers to withdraw from the market, leading to a liquidity crisis reminiscent of the 2009-2010 credit downturn.
Arca’s Chief Investment Officer Jeff Dorman highlighted that the exit of market makers and the absence of liquid funds have dried up liquidity, increasing market volatility due to the lack of intermediaries to smooth trading activities.
Key Takeaways for Investors
Investors should consider the following insights:
- Monitor liquidity conditions closely, especially in markets with weak order book depth.
- Be aware of the impact of large sell orders on BCH and other altcoins.
- Understand the role of market makers in maintaining liquidity and stabilizing prices.
- Prepare for potential future volatility in BCH due to liquidity issues.
The recent drop in Bitcoin Cash, driven by Mt. Gox repayments, underscores the challenges posed by weak liquidity and the reduction of market makers. If liquidity does not improve, similar episodes of volatility could reoccur in the future.