Bitcoin: Mt Gox Dump Rumor Exaggerated, But No Lessons Learned (Cryptocurrency: BTC-USD)

JuSo

The following article looks at the status of Mt. Gox’s infamous bankruptcy, as well as renewed rumors that its recovery plan could negatively impact Bitcoin (BTC-USD) and Bitcoin Cash (BCH-USD) prices. In addition to the previous strength Alongside a simple HODL strategy, the Mt. Gox discussion also highlights two takeaways for investing in broader digital assets:

• The high relative value of the majority voted fork of a blockchain
• Solid custody arrangements include cold storage and audits to prove reserves

However, before turning to Mt. Gox, it makes sense to keep in mind that macroeconomic factors are currently overshadowing any fundamental analysis. Tuesday’s August CPI release proved once again that interest rates and interest rate policy expectations are the most near-term drivers in the digital asset space. Upon publication, bitcoin prices immediately dropped $1300, almost 6%. And even with the merger looming, Ethereum (ETH-USD) is down over 7%.

Month-on-month inflation numbers came in at a cool 0.1%, with key component gasoline down 10.6% for the month. Food price growth remained buoyant at 0.7%, although the rate has moderated compared to the annualized 13.5%. Core prices, however, stunned on the high side. All items excluding food and energy rose 0.6% in August. This was double the July rate, which many market participants had taken as a positive turnaround from the extremes of the second quarter. Among the core values, accommodation and medical services stood out with a high and rising rate of increase.

As a result, only the most optimistic Fed watchers remain hopeful for a 0.5% gain at next week’s FOMC meeting. And on Wednesday, CME futures pointed to a 70 percent chance of a 0.75 percent hike in the federal funds rate. Interestingly, the other 30% is a historical full point increase. Importantly, higher rate expectations continue to hurt the rate-sensitive technology sector and risky assets.

Mt. Gox collapse and rehabilitation

Mt. Gox was a digital asset marketplace founded in 2010. This month, the company announced that it had lost about 750,000 bitcoins from its customers, worth between $400 million and $500 million. These coins are believed to have been stolen through hacks over time, possibly in 2011 and 2012.

Since 2014, there have been complicated bankruptcy and reorganization proceedings and multiple lawsuits over Mt. Gox’s assets. The addressable assets, controlled by a trustee, now consist primarily of 100,000 to 150,000 bitcoins, about $500 million worth of yen, and a relatively small amount of bitcoin cash.

Of course, bitcoin prices have gone from a few hundred dollars per coin to almost $20,000 during this period. And while things get complicated, it now seems likely that despite the significant hacks, the majority of victims will be compensated 5-6x the value of their bitcoin investments around the time of Mt. Gox’s withdrawal freeze and bankruptcy filing. In perspective, this would overturn the return of the Nasdaq Composite in the same period.

Bitcoin dump and speculation

Thursday, September 15th was an important date for the Mt. Gox rehabilitation as a period of no transfers of claims began for most creditors leading up to a first base payment. This deadline effectively limited the ability to make or update claims. And it marks a milestone on the payout schedule.

Each milestone in the process has led to speculation that the eventual payouts would result in a large-scale sale of bitcoins by the trustee to raise funds, or by creditors once bitcoins are returned to them. These speculations remain prominent in the media. For reference and simplified, a round number for the total value of these bitcoins is $3 billion, and creditors can take cash or a combination of cash and coins.

Consider the following recent headlines:

Mt. Gox Redemption Comes “In Reasonable Time” As Bitcoin Dump Fears Spook Market, decrypt.co, September 1, 2022

Mt. Gox Creditors Near Payback as Bitcoin Dump Looms, bloomberg.com, July 7, 2022

Mt Gox Bitcoin Black Swan Event: BTC Price Faces $3B Selling Pressure As Refunds Begin, capital.com, 23 Aug 2022

and these headlines from a previous rehabilitation milestone:

Bitcoin Investors Shiver in Fear as Mt Gox Prepares to Drop 141,000 BTC, fxstreet.com, 11/17/2021

Bitcoin heads for its worst week in months as Mt Gox payouts threaten, reuters.com, 11/18/2021

The headings above are hyperbolic FUD. Bitcoin’s legitimate trading volume per day is highly competitive. But Forbes recently estimated it at $128 billion, and reputable researchers and market participants are estimating it at $25 billion to $35 billion a day. Recall from above, the total value of Mt. Gox bitcoins is about $3 billion, a significant but small fraction in a single trading day.

However, it is important that the position is not immediately or completely liquidated. Creditors may receive most of the rehabilitation payout in kind, and a significant number of those creditors will likely hold some of the coins rather than liquidate them outright. Additionally, a significant percentage of the coins are unclaimed or have unresolved claims or pending court cases. It’s complicated, but multiple repayments are also expected to be further split into different tranches for different choices. The most recent communication from the trustees explained only one of these cases.

If cash repayments are made from the Rehabilitation Trustee’s sale of cryptocurrency, a different settlement date than the settlement dates of other eligible rehabilitation claims may be set with court approval, as the sale of cryptocurrency may take time.

Information on non-assignment etc. of rehabilitation claims, mtgox.com, August 31, 2022

The feared dump highlighted in the headlines above will likely never happen or can ever be detected in actual trading volume.

Mt Gox: Crypto Investing Lessons

In August 2017, long after the collapse of Mt. Gox, disagreements in the bitcoin community caused the blockchain to split into two branches, bitcoin and bitcoin cash. Mt. Gox was a holder before and during this prominent fork and therefore has coins on both chains. Today, Mt. Gox’s bitcoin cash is worth $17 million, a relatively small amount compared to the bitcoin holdings discussed above.

Data from YCharts

The chart above shows the percentage change in value of Bitcoin and Bitcoin Cash since their fork. Interestingly, it is widely believed that the slower, more energy-intensive bitcoin outperformed bitcoin cash because it was perceived to be more secure. In other words, Bitcoin won the brand war.

It is important to realize that there has generally been a fork “winner” and “loser” over time. We have seen something similar, albeit technically different, on Ethereum and Ethereum Classic (ETC-USD) in the past. And crypto space investors could face more decision points in the coming months following this week’s merger on the Ethereum platform.

Beyond what might be called the main new proof-of-stake Ethereum chain, there will likely be an additional branch or two that will generate sustained interest in the weeks following The Merge. In particular, in recent months there have been plans to continue a proof-of-work chain similar to Ethereum Classic. Of course, the initial rating of these chains will determine how they compare to Ethereum over time. But as with Mt. Gox Bitcoin Cash coins, market perception will likely play the key role in valuation over the longer term. In this case, Ethereum has the greatest support from most influential developers, including Vitalik Buterin, as well as support from various industry institutions. Therefore, Ethereum should appreciate significantly over time compared to its alternative forks.

The other obvious lesson from Mt. Gox is that sensible containment regimes include cold storage and quality testing. The hackers are believed to have taken the coins from the Mt. Gox hot wallet and, ironically, an exchange checker was one of several vulnerabilities.

Bitcoin’s value derives from its decentralized, permissionless and transparent ledger operating in a trusted environment. Digital asset marketplaces and other third-party intermediaries pose a complication to owning and storing bitcoin because they are more opaque, require trust, and represent a weak point from a decentralized and permissive perspective.

Whether you are participating through a digital asset marketplace or purchasing an exchange-traded product, be aware of custodial arrangements related to storage and auditing. As a starting point for due diligence, consider Kraken’s proof of reserve checks and Coinbase’s vault (COIN).

Takeaway and bitcoin review

The Mt. Gox cleanup demonstrates a simple Bitcoin HODL strategy that has proven extremely successful over the past eight years. This is despite the current crypto cold snaps and depressed prices.

However, stalled growth in energy and food prices, combined with now-stubborn core inflation, are constantly driving the Fed to make more large rate hikes. This pressure continues to weigh on the rate-sensitive technology sector and risky assets.

I’ve been wrong about the stickiness of inflation this year and have been surprised by the Fed’s willingness to respond vigorously and repeatedly. That being said, there are some reasons to believe the Fed is on the verge of smaller rate hikes. Taking into account my dovish Fed view, alongside the significant correction in Q2 and the fact that bitcoin is being held for the longer term, I keep my buy rating here.

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers