The Breakdown - Mt. Gox Unlocks Send BTC Crashing

Episode Date: July 9, 2024

Bitcoin has recently experienced a 25%+ price decline. The specific catalyst for the most recent dip seems to have been a combination of Mt. Gox BTC on the move and German selling. NLW explores how worries we should be. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, July 8th, and today we are talking about the drop in Bitcoin prices. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown pod. Hello, friends. Well, you leave for a couple of days and Bitcoin just crashes, huh? In all seriousness, while it will surprise you probably not at all that I am not at all concerned about these

price movements, I do think that they are notable, they're getting headlines, they're causing some amount of anxiety, and so it's worth digging into exactly what's going on here. And while sometimes price movements are kind of inscrutable, a weird combination of narrative and market structure, this one feels a little bit more knowable. So, as America celebrated the holiday weekend, Bitcoin markets plunged to new summer lows. Last week's sell-off accelerated on Thursday and continued over the weekend. Bitcoin made two trips below $55,000 on Friday and Sunday night, and we're currently trading around $56,000. A range of bearish narrative and market backers contributed to the largest weekly decline for Bitcoin since November 2022. Do you guys remember

what happened that month? I'm having trouble placing it. In any case, overall, we saw a 14% drop for the week, contributing to a 24% drawdown since the high in early June. What's more, the price action is starting to get into significant territory. It's now comparable to the huge bull market pullbacks from previous cycles, and some think it could be large enough to break bullish sentiment entirely. As for what's driving this price action, there are two main factors. The first is simply seasonality. Summer is always a cyclical low point for Bitcoin liquidity, with the 4th of July weekend, often being the most illiquid period of the year. We can see this effect clearly in exchange volumes, which are now down by almost two-thirds from their local high in March. This low liquidity in

environment can amplify volatility in both directions, but also acts as an overall drag on the liquidity-sensitive asset class. However, the more obvious factor is the narrative of a massive wave of selling from Mount Cox creditors and governments. These narratives have been around for years, but have been ramping up over the past two weeks, really hitting a fever pitch on Thursday. Influencers are starting to add these piles of Bitcoin together and coming up with a terrifying amount of incoming sell pressure. Figures well above 10 billion are being thrown around, and content has pivoted to panicked takes. While there may be a lot of nuance in how much you should care about these narratives,

it is undeniable that the panic is at this point and as validated by last weekend, real. In other words, regardless of how much Bitcoin is actually sold from the Mount Cox distribution and those government holdings, it's clear that some retail traders are not hanging around to find out. Indeed, if there was one major trigger for the accelerated drawdown, it was the Mount Cox distribution. In the final week of June, the Mount Cox trustee signaled that they were ready to distribute Bitcoin to creditors. They gave very little information on how long they would take to get started, or the total to be distributed during this round. Headlines had flattened the narrative, blaring that $9 billion worth of Mount Gawks' coins were about to flood the market, and on Thursday,

those coins started moving. There were a series of small test transactions during the day, but in the evening, Mount Gawks moved more than 47,000 Bitcoin out of cold storage and into hot wallets. That tranche is worth around $2.7 billion, representing around 2 thirds of Mount Cox holdings. As of Sunday night, only 85 million worth of Bitcoin had been moved to distribution agents. Bitbank, which is handling claims for some Japanese creditors, is the only agent to receive coins at this stage. The rest of the Bitcoin remained within Mount Cox wallets. But this was still a clear sign that the distribution had finally begun after a decade of waiting. Markets responded dramatically as soon as large movements were detected in the Mount Cox wallet system. The past day had already

seen a 6% down move. With Mount Cox headlines blaring across Twitter, Bitcoin plunged by a further 9% across the next six hours. To be clear, none of this selling pressure actually came from the Mount Cox coins themselves. The Bitcoin held by Mount Cox is being distributed in-kind to creditors, rather than being sold into dollars for distribution as we've seen in other bankruptcies. So far, only a tiny fraction has been sent to distribution agents, and it will take some time before these funds are available to individual creditors. That means that this sell-off is purely about the market trying to price in the Mount-Gox distribution, rather than creditors actually selling off their coins. We don't have a good idea of how long the distribution will take to be finalized.

The estate has a deadline in October to conclude this round of repayments. Wallet activity is showing several test transactions on Sunday, so presumably the distribution will continue this week. But at this stage, we simply don't have good information. The Mount Cox trustee has asked creditors to, quote, wait for a while, and that's about as specific as they've been. We do have some additional information from distribution agents. Cracken have signaled it will take them up to three months to credit individual accounts, while BitStamp expects payouts to be available within two months. Smaller exchanges are looking to make funds available inside of three weeks,

which means the bulk of actual selling pressure is likely to be months away. So, there are two competing narratives then about the Mount Cox distribution and how much of it will be sold off. One of those, and the simplest is that a ton of Bitcoin supply is about to be liquidated. Jacob King of Whalewire wrote, No Bitcoiner will say this out loud, but the majority of the Bitcoin that is set to be distributed back to X clients are going to be sold off. I understand this is controversial, but based on the current low demand volume, this will easily send Bitcoin back into a harsh bare market. The other take is a combination of this only being a partial distribution, and Mount

Cox creditors being diamond-handed hoddlers. Alex Thorne of Galaxy Digital has been unpacking this take over the past month. Thorin estimates that only $6 billion worth of Bitcoin will be distributed in this first round of payouts, which required creditors to take a 10% haircut. Thorne also notes that bankruptcy claims have been highly sought after for years, an argument that individual creditors who remain are not necessarily in a rush to sell. Peter Chung of Presto research echoed this point, stating, we believe they are largely diamond-handed hardcore Bitcoin investors and therefore selling will be limited. Bette Albaz, managing director of Hashke Global, thinks the distribution finally happening is an extremely positive development, stating, the Mount Cox distributions were one of the

biggest overhangs in the market for quite a long period of time, though this overhang will finally get cleared out as the distributions start in July. I think you could easily argue both sides of this. On the side that says we're likely to see a lot of sell pressure, the reality is that this is a resource that has been locked up for an extremely long period of time, and by virtue of that, already represents a great return for those investors who have been forced hoddlers. By that logic, these assets finally becoming liquid, could mean that people will take advantage to get out of the market. But then there's the flip side, and there is a lot of flip side. First of all, think about who was trading on Mount Gox back when Mount Gox was hacked. It was people a hell of a lot

more early than the average Bitcoin or crypto content consumer or creator, frankly, right? That means that they had early interest in conviction ahead of whatever the average in the market is. What's more? Being a forced hoddler and seeing how Bitcoin has continued to defy, while everyone at various points to continue to do nothing but go up over time, likely made people have higher rather than lower conviction from where they started. Then on top of that, there is the fact that there has been a market for claims, which for those who needed to get some amount of liquidity earlier than this distribution was an available resource, suggesting that even if you believe nothing else,

the idea that somehow there's going to be a massive, immediate cell pressure probably isn't the way that it would play out. Ultimately, from where I'm sitting, I think that this narrative overhang is going to be here until all of it's been distributed until we actually see what people do with it. And so in my estimation, by and large, the sooner it gets distributed,

and the sooner we see what actually happens, whatever it is, the better. The one thing that is for sure and unarguable is that once whatever selling is coming is done, Bitcoin will be right back representing exactly what it represents, with all the same future prospects that it's always had, just maybe at a different price. Hello, friends, before we get back to the rest of the show, I want you to join me at Permissionless. Permissionless is a conference for Cryptonatives by Cryptonatives.

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and if you want 10% off, use code breakdown 10 when you check out. If you go to the Blockworks website, blockworks.com, there will be lots of information about how to register, and again, use code breakdown 10 to get 10% off. Like I said at the top, though, I do think that it's worth taking seriously because these stories now have a new audience as well, which is the obviously much less diamond-handed financial industry investors who are buying in through things like the ETF and who could be more sensitive to these movements as bigger signals. than they actually are, or at least bigger signals in the short term because the short term is where

that category of investors spend their time. The other big overhang is selling from the German government. They began liquidating seized Bitcoin in the middle of last month and had been in the market almost every weekday since. Tuesday's tranche was a massive 172 million shoved straight into illiquid books during the U.S. holiday. Their stack started off at around 49,800 Bitcoin worth around 3.3 billion. So far, the Germans have managed to liquidate around 15% of their holdings with sales accelerating last week. With 42,000 Bitcoin left, the German government could keep selling at their current increased pace well into the fall. We don't have a particularly good idea around how this liquidation is being carried out or what the intentions are. Outflows

from the German wallets are being spread across multiple exchanges and trading desks. There are also recurring transactions to unidentified wallets, which are presumed to be tied to over-the-counter markets. On Thursday, German wallets received 111 million worth of Bitcoin from multiple exchanges and unknown entities they have been dealing with. This was reported across some less reputable crypto news sites as a surprise buyback, but that seems wildly unlikely. It would make more sense that exchanges and trading desks were just returning any unsold Bitcoin from that day. Thursday's transactions were also much larger than usual, so there might have been an error somewhere in the process. More selling happened on Friday and again this morning, suggesting that at least for the time

nothing has changed about the German government's overall plans. More interesting is the selling rising to the attention of local lawmakers. Independent parliamentarian Yawanna Kotar is beginning to criticize the liquidation, tweeting, instead of holding Bitcoin as a strategic reserve currency, as is already being debated in the USA, our government is selling on a large scale. I informed our leaders why this is not only not sensible, but counterproductive. In further comments to Forbes, Kotar said, I can only speculate as to why the government is selling right now. We have massive budget shortfalls in Germany at the moment, which could be one of the reasons. The upcoming elections may also

play a role. I'm not at all sure whether the government was or is aware of the consequence of its sales. It also doesn't seem to have known that such sales are not necessarily carried out via stock exchanges, but rather OTC. Crypto Quant CEO Ki-Yung-Ju urged traders to keep their heads and look at the bigger picture, tweeting, government Bitcoin selling is overestimated. $224 billion has flowed into this market since 2023. Government seized Bitcoin contributes about $9 billion to the realized cap. It's only 4% of the total cumulative realized value since 2023. Don't let government selling fud ruin your trades. Jew is referring to the combined total of seized Bitcoin across all governments,

including the $12 billion worth owned by the U.S. government. And as we've noted before, while those holdings are making their way into a lot of commentary at the moment, the U.S. holdings are spread across many ongoing lawsuits, making them far less likely to be sold off in a hurry. So summing this up, at this point, we're looking at somewhere between zero and nine billion in selling pressure from Mount Cox creditors, and between zero and two billion from the German government over the next two to six months. No one really knows exactly how much will flow through the order books or the timescale.

If anything, this uncertainty is amplifying the fear in markets. With little information to go on, it's much easier for markets to freak out about the worst-case scenario coming to pass, than it is to price in something more moderate. After surveying the crash on Thursday, Galaxy's Alex Thorne made the point that his predictions of realistic selling pressure don't actually matter in this context. He tweeted, even if I'm right that these coins are not going to be dumped en masse by creditors, the fear is palpable, particularly with the Germans also dumping on us. We'll get through this overhang and we never have to talk about it again. Others pointed out how long Bitcoin had gone without a correction of this size. Charles Edwards of Capriol investments wrote,

Bitcoin's all-time longest winning streak just ended, 427 days without a 25% drawdown, beat the 2012 record by 63 days. Pretty incredible run we've had and well overdue for a correction. Ben Caseland, chief marketing officer of Crypto Exchange startup Valor said, volatility and periods of selling do not change Bitcoin's core thesis. With any luck, we can expect prices in the lower 50,000s or even slightly lower for weeks, but nothing fundamental has changed about the market structure, and current price movements are really only a concern to short-term speculators.

So my friends, that is the story from here. Like I said, a bit more obvious, I think, around where this is coming from as compared to some other price action we've had in the past. I do not mean to be Polyanish. I do not mean to be unimpressed with the pain that comes with any market correction. But ultimately, whatever the selling pressure represents, all that it represents is a short-term consideration that will, before you know it, be firmly in the rear view. That's going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.