Insight
May 31, 2024
Earlier this week, the bitcoins under the control of the Rehabilitation Trustee in the Mt Gox bankruptcy case made their first on-chain movement in many years, causing a stir among investors and leading to a drop in the price of bitcoin. As a refresher, Mt Gox, a Japan-based exchange, was once the dominant trading platform in the early days of bitcoin, accounting for over 90% of daily trading volume at its peak. However, in 2014, following the loss/theft of 850,000 bitcoins, a portion of which was later recovered, the company filed for bankruptcy, creating numerous individual creditors who had kept balances on the platform.
After seemingly unending setbacks and false starts, the Rehabilitation Trustee is finally gearing up the initial phase of reimbursing creditors. The Base, Early Lump-Sum, and Intermediate repayments are slated for completion by October 31, 2024 (creditors opting for the Final repayments may face a more extended timeline, potentially stretching out over several years). With control over a horde of nearly 142K bitcoins ($9.6B at $68K/BTC) and an equivalent amount of bitcoin cash coins, concerns have been high about these coins coming to market.
The potential shift from (forced) long-term storage into the hands of creditors who might opt to sell them has been cause for apprehension over the years. Mt Gox filed for bankruptcy over a decade ago when bitcoin was a fraction of its price today. Given the length of the bankruptcy and appreciation since the initial bankruptcy, there is speculation most creditors would opt to sell their bitcoin upon receiving them, flooding the market, and sinking bitcoin's price.
Attempting to measure the impact of coins entering the market is a task fraught with uncertainty, mainly stemming from assumptions about retail creditor preferences to hold or sell. Our assumptions and analysis set forth are based on surveys conducted among creditors throughout the bankruptcy proceedings. It is worth noting that people's actions may not always align with their stated intentions. What we can affirm is that the Rehabilitation Trustee consolidated the bitcoin balances, totaling 141,686.2 BTCs, into three addresses with equal balances (here, here, and here), and the Trustee said it has not liquidated any cryptocurrency yet. To receive distributions, creditors are required to onboard with BitGo, Kraken, or Bitstamp, which would then facilitate the final payments, implying that these 3 addresses are intermediate holding addresses, still under control by the Rehabilitation Trustee.
According to our analysis and assumptions, there is a potential for $1.5B worth of bitcoins to enter the market when distributions take place. While this is a significant sum, it's important to consider the daily trading volume of bitcoin, which ranges from $1.0 - 1.5B for USD quoted bitcoin and $4.0B for USDT quoted bitcoin. In the grand scheme of things, $1.5B may not have as large of an impact when compared to the daily spot trading volume in USD and USDT. Additionally, the muted market reaction to Gemini distributing $2.18B in crypto this week to previously frozen Earn users suggests that the impact of Mt Gox distributions may be less drastic than initially feared. While the exact timing of the Mt Gox distribution remains uncertain but likely edging closer, our estimates and real-world examples indicate that the fear of the event might be worse than the event itself.
The Bitcoin network difficulty was upwardly adjusted last Thursday, a sign that miners were back to adding hash rate following the halving in April. The upward adjustments of 1.5% follows a 5.6% reduction in the first full difficulty adjustment window following the halving, likely reflecting the elimination of hash rate that was no longer economical after the halving. If this upward revision marks the end of the downward revisions post the fourth halving, it would mark the shallowest of the downward difficulty adjustments in the wake of all halvings. Since the April 19th halving, the Bitcoin network difficulty adjustment hit a trough of -3.8% (-4.2% since the post halving high), while past halvings saw difficulty adjustments trough at -5.4%, -13.4%, and -14.7%.
There has been widespread community concern regarding the actions miners may take with their bitcoin balances post the halving induced hash price decline. However, our analysis contradicts this notion and shows the opposite - miners are increasing their balances.
Concerns have arisen due to the halving event and the subsequent decline in the hash price, which dropped from $100/PH/s/d prior to the halving to $55/PH/s/d today. While some blockchain analysis has suggested that miner balances were decreasing, this data primarily focuses on pool addresses, which are where block rewards are sent for each successfully mined block. However, a closer look at bitcoin balances held one step away from the pool's address reveals that miners are increasing their holdings. The chart indicates that pool balances may be decreasing, but miners who contribute their hash rate to the pools are, in fact, growing their balances.
Analyzing data from public miners provides further insight into this ongoing trend. Since reaching a low point in February 2023, these miners have consistently been increasing their bitcoin holdings. There are two key factors that set this analysis apart from blockchain analysis. Firstly, blockchain analysis may lack precision as it could include balances held in addresses not under miners' control. Secondly, publicly traded miners may be making distinct capital market decisions compared to their private counterparts. Equity offerings, such as At-the-Market (ATM) offerings, have gained popularity among publicly traded miners as a means of financing, while private miners may have fewer options for capital raising, potentially leading to a greater tendency to sell bitcoins.
Bitcoin remained within a tight trading range this week, with support at $67K and resistance at the $71K level. The movement of coins linked to the Mt Gox bankruptcy influenced trading early in the week, putting a damper on price. However, as previously mentioned, this impact on the market should be less significant than many anticipate given the preponderance of those receiving coins to hold.
Despite the strong inflows into the spot ETF complex, which total $2.1B since May 13th, the market has been in a holding pattern over the last 10 days. It seems that various macroeconomic factors, coupled with concerns surrounding Mt Gox, are influencing the current landscape. Increasing expectations of interest rate hikes and persistent inflationary pressures are putting pressure on risk assets, including bitcoin.
Returning to the world of ETFs, there's a new leader in the AUM game as BlackRock claimed the top spot from Grayscale this week. Grayscale isn't sitting down, however, as NYSE Arca submitted form 19b-4 to list and trade the Grayscale Bitcoin Mini Trust this week. Typically, there’s a 7 - 14-day period for the SEC to acknowledge the change of rule request, followed by a 6-day period to publish in the Federal Register, marking the start of the official SEC review window.
Amidst all the buzz, the spotlight may soon shine on ETH ETFs as developments continue to unfold. ETF sponsors are revising and resubmitting their registration statements, including BlackRock and Grayscale this week. Furthermore, the SEC has begun actively engaging with sponsors, as Bitwise representatives recently met with the Division of Trading and Markets. While this process may seem a bit backwards given the fact that 19b-4s were already approved by the Division of Trading and Markets, we think this signifies progress towards the start of trading. We anticipate more meetings with sponsors, including those with the Division of Corporation Finance, before ETF trading commences. ETF trading appears on to be on track for a late June timeframe.
One final item, next week is the deadline for the President to sign into law or veto the repeal of SAB 121. While the White House initially indicated it would veto the repeal, given the changing regulatory and legislative attitude towards crypto, it is unclear how the administration will handle the matter.
Investing:
Bitcoin and Ether ETF Market Expected to Grow to $450B: Bernstein - CoinDesk
Two Blackrock Funds Added the Firm's IBIT Spot Bitcoin ETF to Portfolio in Q1 - The Block
Leveraged Ether ETF to Start Trading June 4, Sponsor Volatility Shares Says - CoinDesk
Ether Options Trading Volume on CME Hits New Peak in May - The Block
Regulation and Taxation:
Treasury Sanctions a Cybercrime Network Associated with the 911 S5 Botnet - US Treasury
2024 Election: The Role of Crypto - Grayscale
Terraform, Do Kwon Agree in Principle to Settle New York Fraud Case With SEC - CoinDesk
Companies:
Riot Proposes to Acquire Bitfarms for US$2.30 Per Share to Create the World’s Largest Publicly Listed Bitcoin Miner - Riot Platforms
Bitfarms Responds to Unsolicited Proposal from Riot Platforms - Bitfarms
Crypto Prime Broker FalconX Starts Forex Desk with Hires from BCB Group - CoinDesk
Gemini Earn Users Receive $2.18 Billion of Their Digital Assets in Kind — a 232% Recovery - Gemini
Risky New Experiments Attract Billions of Dollars in Bitcoin - Bloomberg
Babylon Completes $70M Raise Led by Paradigm to Advance Trustless Bitcoin Staking - Babylon
Hidden Road Restricts Clients from Bybit After KYC, AML Disagreement - Bloomberg
Bitdeer Announces Up to $150 Million Private Placement Financing - Bitdeer
June 12 - May CPI reading
June 12 - FOMC rate decision
June 28 - CME expiry
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