Bitcoin Cash (BCH), a cryptocurrency that emerged from a split in the Bitcoin blockchain in 2017, experienced a significant 20% decline in value last week, marking its most substantial decrease since April. This drop occurred in response to the announcement by the defunct exchange Mt. Gox regarding the repayment of creditors affected by a 2014 hack, which included approximately $73 million worth of BCH, equivalent to 20% of the token’s daily trading volume.
The panic selling triggered by BCH holders, who anticipated potential mass sell-offs by the Mt. Gox creditors, was exacerbated by inadequate liquidity on centralized exchanges. Poor liquidity, characterized by shallow order-book depth, makes it challenging for traders to execute large orders without significantly impacting the asset’s price, leading to heightened volatility in the market.
Analysis from Paris-based Kaiko revealed that on the day Mt. Gox announced reimbursements, BCH markets on Bybit and Itbit experienced a substantial increase in slippage, indicating deteriorating liquidity conditions. Slippage refers to the variance between the expected and actual trade prices, with a surge in slippage reflecting poor market liquidity and increased volatility.
The issue of inadequate liquidity has been particularly pronounced in alternative cryptocurrencies (altcoins) following the bankruptcy of FTX exchange and Alameda Research in November 2022. Alameda Research, a major market maker, provided significant liquidity in altcoins, and its exit from the market has contributed to the liquidity challenges faced by these assets.
Jeff Dorman, the chief investment officer at Arca, likened the current market conditions to the 2009-10 credit markets, highlighting the absence of market makers and the resulting lack of liquidity. He emphasized that the impact of Alameda/FTX’s fallout continues to reverberate through the market, leading to constrained liquidity, exacerbated selling pressure, and heightened volatility in token prices.