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Mt. Gox repayments test and German BTC sell-off: Bitcoin still bullish?

Bitcoin has experienced a stark correction in the last 24 hours, sparking fear in the market. Could the possible short-squeeze scenario reignite the bullish flames?

In June 2024, the defunct Bitcoin (BTC) exchange Mt. Gox announced a major move that could shake the crypto world. This once-dominant platform, infamous for losing 850,000 BTC in a 2014 hack, is set to distribute the recovered assets to its creditors.

According to Nobuaki Kobayashi, the Rehabilitation Trustee, repayments will commence in early July. The plan involves distributing 142,000 BTC and Bitcoin Cash (BCH), worth about $8.22 billion at current prices.

This announcement, while providing long-awaited relief to the victims, has also introduced a wave of uncertainty and potential volatility to the Bitcoin market. 

In preparation for the repayments, Mt. Gox conducted several test transactions on July 4. These tests included moving small amounts of Bitcoin, totaling around $25, across different wallets to ensure the system’s readiness.

Compounding the situation is the large activity from the German government. Over the past few weeks, the German government has been on a constant BTC selling spree. Notably, on July 4, 2024, they moved millions in BTC. 

This includes $75 million transferred to major crypto exchanges like Kraken, Coinbase, and Bitstamp, adding to the market’s anxiety, as large transfers to exchanges often signal potential sell-offs, which can drive prices down.

As of this writing, the German government holds over 40,350 BTC worth over $2.3 billion, representing a 20% decline from their holdings of over 50,000 BTC on June 19.

Amid all this drama, on July 4, Bitcoin hit a low of $57,000, a sharp decline triggered by the news of the impending Mt. Gox repayments and the German government’s actions.

Despite a slight rebound to around $57,800, Bitcoin has declined by nearly 4% in the last 24 hours, dropping below its 200-day moving average for the first time since October 2023, further exacerbating concerns among investors.

Let’s delve deeper into this saga, exploring what it means for Bitcoin prices and where things could go from here.

Mt. Gox saga and the likely impact of liquidations

Mt. Gox, once the world’s largest Bitcoin exchange, was founded in 2010 and quickly became the go-to platform for Bitcoin trading, handling around 70% of all Bitcoin transactions by its peak. However, Mt. Gox’s prominence came crashing down due to a series of devastating hacks.

The first major hack occurred in 2011, when hackers stole 25,000 Bitcoins, valued at around $400,000 at the time. This was just the beginning of Mt. Gox’s troubles. 

In 2014, a catastrophic security breach led to the loss of nearly 650,000 Bitcoins belonging to customers and about 100,000 of the exchange’s own. This amounted to approximately 7% of all Bitcoins in circulation, valued at around $473 million, with Bitcoin priced at roughly $600 each.

Following the 2014 hack, Mt. Gox declared bankruptcy, leaving creditors owed 45 billion yen (around $414 million). Since then, creditors have been waiting for the repayment of their lost holdings, and it looks like their patience might finally be rewarded this month.

With the announcement of the redistribution of 142,000 BTC, the market is bracing for potential turbulence. Such a large influx of Bitcoin into the market could create enormous selling pressure, driving prices down. 

To further illustrate, let’s break down the potential impact of an $8.22 billion injection into the Bitcoin market. The current daily trading volume of Bitcoin is approximately $30 billion. Introducing $8.22 billion worth of Bitcoin into the market represents about 27% of the daily trading volume.

If this amount is sold rapidly then it could potentially decrease Bitcoin prices by a high margin, considering that sell-offs of even 10-15% of daily volume have previously led to 10-20% price drops.

If sold gradually over several months, then the market might experience 2-3% price corrections periodically, which would be less destabilizing but could still influence the overall market sentiment and lead to a bearish trend.

What to expect next?

Bitcoin’s recent price movements have left investors on edge, wondering where the market might head next. 

Peter Schiff, a well-known Bitcoin critic and chairman of Schiff Gold, a precious metal dealer, has added to the market’s anxiety by mentioning Bitcoin’s current critical support level. 

He warns that if Bitcoin falls below this support, it could lead to a large drop. Schiff’s comments often emerge during market downturns, intensifying panic and uncertainty among investors. Hence, one should always take them with a grain of salt.

Contrasting Schiff’s pessimism, Michaël van de Poppe, a notable crypto analyst, argues that the crypto cycle has not yet peaked. He believes that many claims about the end of the crypto boom are exaggerated. 

Van de Poppe believes that there is still potential for growth and that the market might see new highs before entering a downturn.

Meanwhile, another crypto analyst notes that Bitcoin is still trading within a specific range. They suggest that while morale is down, the structural integrity of Bitcoin’s market position remains intact. 

Ali, a well-regarded crypto analyst, mentioned a critical short-term trading pattern. He notes that many Bitcoin traders have recently decided to short Bitcoin, creating large short positions around the $59,600 level.

This setup has formed a “liquidation wall,” which means that if the price of Bitcoin starts to rise, these short positions could be forced to buy back Bitcoin to cover their losses, potentially driving the price up rapidly. 

The possible short squeeze scenario could lead to sudden and high price spikes, adding to the near-term volatility, indicating possible volatility ahead.

As always, you should stay informed and be prepared for both potential downturns and opportunities for growth. Always remember the golden rule: never invest more than you can afford to lose.