Cycle Capital: Analysis of the selling pressure of Mt. Gox repayment

24-07-12 17:31

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Original source: Cycle Capital Research

MtGox bankruptcy

Founded in July 2010, MtGox is a Japanese exchange, the earliest and largest exchange in the cryptocurrency world, with a trading volume that once accounted for more than 80%. In 2013, 850,000 bitcoins were stolen from Mentougou, causing the exchange to go bankrupt. Subsequently, about 200,000 tokens were recovered. Since 2014, investors and court-appointed trustees have launched lengthy compensation lawsuits for these 200,000 coins. About 60,000 BTC were paid as various fees, and about 140,000 BTC remained.

Debt trading

After the incident, during the long period of waiting for the results, institutions have been acquiring Mentougou's debts, and debt trading between individuals is also common. For example, in 2019, Fortress Investment Group sent extensive inquiry emails to creditors, purchasing BTC at a price of $900, which was twice the price of Bitcoin when Mentougou went bankrupt. The price of debt transactions will fluctuate with market conditions. If the original creditors are worried that they will not be repaid, they can sell their debts to get back part of the principal.

Compensation plan

In 2021, Mentougou passed a compensation plan, and creditors can get back the remaining value of the exchange.

According to the compensation plan, since the stolen assets can no longer be recovered, the Mentougou Exchange can only compensate the creditors for approximately 23.6% of the original debt. If the creditor chooses to accept the early lump-sum compensation, there will be a discount, and the compensation rate is only 21%; if not, the creditor may have to wait for a long time, and the final compensation may be more or less. At present, the proportion of creditors who have not been able to find early lump-sum compensation.

The composition of the compensation assets is divided into two parts, one is cash, which comes from the proceeds of BTC sold by the Japanese government during the high point of 2017, and the other is BTC. Cash is 5%-10%, and BTC is 95%-90%. The specific ratio can be selected. It can be seen that more than 90% of the compensation is BTC.

Regarding the claim time (which is also the time when BTC enters the market), it may take two to three months. A total of 5 exchanges will accept the BTC used by Mentougou for repayment and then distribute it to the creditor's account. The timetable for each exchange is different. Kraken needs 90 days, Bitstamp needs 60 days, BitGo needs 20 days, SBI VC Trade and Bitbank will complete the payment within 14 days. This time is the longest time, and it may be advanced.

In addition, the deadline for early lump-sum compensation is October 31, 2024. This time will not be modified unless approved by the court.

Current Progress

In May 2024, the BTC in the cold wallet of Mentougou moved for the first time since 2018, causing market panic. On July 5, 2024, 47,000 tokens were moved from the Mentougou account address, of which 1,545 BTC were transferred to bitbank and began to be paid. On the same day, the German government sold BTC, and the maximum daily decline exceeded 8%.

As of July 12, 138,000 BTC were still in the account address of Mentougou, and it can be considered that the selling pressure of Mentougou has not actually entered the market. The decline on July 5th is part of the realization of the expected decline in Mentougou's selling pressure.

Figure: Mentougou account balance

Figure: Recent transfer records of Mentougou accounts

Selling pressure analysis

Mentougou creditors will sell some BTC, but they should not sell all of them.

From the perspective of profitability, according to cost calculation, when Mentougou went bankrupt, the BTC price was $485. If it is the original creditor, according to the current price, BTC has increased by 120 times; the amount of BTC paid by Mentougou is about 20% of the original holdings, so the profit is about 24 times. Even if it is a debt acquisition, there is more than 10 times the profit. In addition, the debt acquisition agency may hold more BTC, and it will not sell all of it because it is optimistic about BTC in the long term.

From the perspective of the holder, during the long litigation process, the widespread debt trading market has given paper hand creditors ample opportunities to exit. Those who are willing to buy debts should be more long-term BTC holders.

Assuming that the proportion of early lump sum repayment is 75%, the total number of BTC repaid is 105,750, the discount is 11%, and the actual number of BTC used for repayment is 94,117; and assuming a selling ratio of 30%, 50%, and 70%, and a selling time of 1 to 3 months, the number of BTC sold in different situations can be calculated. As shown in the following table:

How much impact does such supply have on the market? You can refer to the recent BTC supply caused by the German government and the demand for BTC ETFs during this period for further analysis.

Comparison of the market impact of the German government's BTC sales

Since June 19, the German government has sold its 50,000 BTC through centralized exchanges. As of July 12, there are 6,394 BTC left in its address, which means that about 43,700 BTC were sold in 23 days, which is worth about $2.4 billion at $55,000.

During this period, the maximum drop in the daily line was about 19% (from 66400 to 53500), and the daily line entity column dropped by about 14% (from 64800 to 55900). The largest single-day drop occurred on July 5, when Mentougou transferred 47,000 tokens (of which only 1,500 entered the exchange). Under the double pressure, BTC hit 53.5K on July 5, with a single-day drop of 8.5%, which was the lowest point of this round of decline. After July 6, BTC rebounded, reaching a maximum of around 59500.

Combined with the transfer of tokens by the German government, it can be clearly seen that the market's expectations for the decline in token sales are ahead of the actual sale time of the tokens. When the German government began to transfer BTC in small amounts, the market continued to fall. From June 19 to July 7, a total of 18 days, the German government sold about 10,000 BTC, with an average daily sale of 556 tokens. On July 5, after the German government + Mentougou double pressure pin, the actual selling pressure of the German government increased, but the market's ability to bear was also strengthened. On July 8, the German government sold nearly 13,000 BTC, and the market pin did not break the previous low, and the daily closing rose. From July 8 to July 12, the German government outflowed about 33,700 tokens, and BTC has been fluctuating between 54K and 60K.

Figure: Schematic diagram of BTC outflow held by the German government (as of July 11)

BTC ETF Demand Analysis

BTC ETF is a relatively stable buy order in the current market. During the period when the German government sold tokens, there were 15 working days from June 19 to July 10. During the 15 days, the ETF had a net sale for 6 days, selling $470 million; there were net purchases for 9 days, buying $1.07 billion, with a net inflow of 600 million and a daily average of 43 million. The main purchases occurred after July 5, with a total of more than $800 million in purchases.

As can be seen above, the German government sold a total of 40,000 tokens to the market during this period, about $2.4 billion. Therefore, the demand for BTC ETF is not enough to provide sufficient support, and the market price has fallen.

Table: BTC ETF daily net inflow (June 20 to July 10)

Conclusion

If the compensation in Mentougou is sold out within a month, the selling pressure faced by the market will be highly similar to the German government's selling, with the amount and time of selling being similar. According to the current demand for ETFs, it cannot provide sufficient support, and the price of BTC may fall further.

If the compensation in Mentougou lasts longer (2-3 months), the amount of BTC entering the market every day will not be particularly large, and it will not cause a one-time decline. However, due to the continued expectation of selling pressure, there may be a period of volatility to digest the selling through volatility. This also means that it is difficult for the main rising wave to come in the short term.

Currently, only 1,545 tokens of Mentougou have been transferred to the exchange, and the rest are still in Mentougou's account. It can be considered that the actual selling pressure has not yet entered the market. When the BTC held by Mentougou is distributed to several exchange addresses on a large scale, it may cause a large panic drop, thus forming a plunge. When a specific individual sells, it may not necessarily cause a significant drop in price due to dispersion and difficulty in tracking and observation.