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Bitcoin Cash (BCH) was shaken last week by Mt. Gox’s announcement to repay creditors. Created in 2017 through a hard fork of the Bitcoin Blockchain, BCH lost 20% of its value following this announcement. This drop marked the biggest loss since April. Mt. Gox decided to start repaying approximately $9 billion worth of tokens stolen in the 2014 hack to creditors. Among these tokens was $73 million worth of BCH, accounting for 20% of BCH’s daily trading volume.
The Real Danger May Be in BCH Price
Mt. Gox creditors anticipating potential liquidations led BCH holders to panic sell due to weak liquidity on centralized exchanges. Paris-based Kaiko describes this situation as “weak order book depth.” In a market with weak liquidity, executing large orders at fixed prices becomes difficult, increasing volatility.
Kaiko‘s data shows that for a simulated $100,000 sell order on centralized exchanges, the BCH bid-ask spread reached its highest level in over a month. This indicates that large market orders are worsening liquidity due to insufficient order depth.
Market Makers Decrease and Liquidity Issues Arise
The decrease in market makers providing liquidity in crypto markets poses a serious problem, especially for alternative cryptocurrencies or altcoins. The bankruptcy of Alameda Research and FTX in November 2022 led liquidity providers to exit the market.
According to Arca’s Chief Investment Officer Jeff Dorman, this situation has led to a liquidity drought similar to the 2009-2010 credit crisis. Dorman noted that liquidity dried up due to market makers exiting and no inflow of liquid funds. This increased market fluctuations as there were no intermediaries to smooth out trading.
Bitcoin Cash‘s drop triggered by Mt. Gox repayments led to large price ranges on centralized exchanges under weak liquidity conditions. This highlighted issues such as the decrease in market makers and drying up of liquidity. Similar situations are likely to occur in the future unless measures are taken to increase liquidity.
