Bitcoin cash’s sell-off, amplified by poor liquidity, echoes Mt. Gox-led decline in price.
Market Turmoil Strikes BCH Amidst Poor Liquidity
Bitcoin cash (BCH), a cryptocurrency created by a hard fork of the Bitcoin blockchain in 2017, fell 20% last week, its biggest slide since April, according to data on TradingView and CoinDesk. This significant drop in value has left many investors concerned about the future of BCH.
What Triggered the Sell-Off?
The sell-off happened as defunct exchange Mt. Gox said it would begin paying back creditors the roughly $9 billion worth of tokens taken in a 2014 hack. This announcement sparked panic selling by BCH holders, who anticipated potential mass liquidations by the Mt. Gox creditors.
Understanding Slippage and Its Impact
Poor liquidity across centralized exchanges has amplified the panic selling, leading to a volatility explosion. According to Paris-based Kaiko, slippage is the difference between the expected price of a trade and the actual price at which it is executed. A spike in slippage is representative of poor market liquidity and/or high volatility.
Slippage Across Centralized Exchanges
On July 5, the day Mt. Gox announced reimbursements, slippage in BCH markets listed on Bybit rose to 2.8% from 0.2% and on Itbit to 3.5% from 0.3%. This significant increase in slippage indicates worsening liquidity due to insufficient order book depth for large market orders.
The Impact of Poor Liquidity
Poor liquidity has been a problem, particularly for alternative cryptocurrencies – that’s everything other than BTC – since the FTX exchange and its sister concern, Alameda Research, went bankrupt in November 2022. Alameda was one of the biggest market makers, providing billions in liquidity in altcoins.
The Ripple Effect
According to Jeff Dorman, chief investment officer at Arca, market makers have completely disappeared in a situation analogous to the 2009-10 credit markets. The fallout of Alameda/FTX in 2022 is still rippling through the market as market makers have exited the business, liquidity has dried up, and there are no intermediaries to help smooth out trading.
The Consequences of Poor Liquidity
Dorman explained in a LinkedIn post: "The fallout of Alameda/FTX in 2022 is still rippling through the market as market makers have exited the business, liquidity has dried up, and there are no intermediaries to help smooth out trading. And since liquid funds are not getting inflows, and retail has moved back to memecoins and equities, if someone has to sell a token, it just gets hammered."
The Future of BCH
As BCH continues to struggle with poor liquidity and volatility, many investors are left wondering about the future of the cryptocurrency. Will BCH be able to recover from this significant drop in value? Only time will tell.
Conclusion
The recent sell-off in BCH has highlighted the importance of market liquidity in maintaining a stable price for cryptocurrencies. As investors continue to navigate the complexities of the crypto market, it’s essential to understand the impact of poor liquidity on asset prices.
Recommendations for Investors
- Diversify your portfolio: Spread your investments across different asset classes to minimize risk.
- Stay informed: Keep up-to-date with market news and trends to make informed investment decisions.
- Invest in stable assets: Consider investing in stablecoins or other low-volatility assets to protect against market fluctuations.
Final Thoughts
The crypto market is inherently unpredictable, and events like the Mt. Gox announcement can have a significant impact on asset prices. As investors, it’s essential to stay informed, diversify your portfolio, and invest in stable assets to minimize risk.
Sources:
- Kaiko
- CoinDesk
- TradingView
- LinkedIn (Jeff Dorman)
- Bloomberg
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