Mt. Gox's Billion-Dollar Bitcoin Bonanza: Boon or Bane for Crypto?

A bitcoin exchange that fell apart a decade ago due to a cyberattack-  Mt .Gox, is preparing to give back trillions of dollars worth of cryptocurrency to its customers — and this has the investors concerned.

The insolvent bitcoin exchange Mt. Gox is set to repay tens of thousands of clients nearly US$8.7 billion in digital tokens in a few days. The platform collapsed in 2014 due to a string of robberies that led to losses between US$650,000 to US$950,000 in bitcoin, or as much as US$58 billion at today's exchange rates.

The compensation is the result of a lengthy bankruptcy journey filled with numerous setbacks and legal disputes.

On Monday, the trustee appointed by the court to manage the bankruptcy of the exchange announced that payments to the approximately 20,000 creditors of the firm would start in early July. These payments will be made in a combination of Bitcoin and bitcoin cash, a newer version of the original cryptocurrency.

This is positive for those affected by the breach who have been enduring long waits for resolution, yet, the cost of bitcoin dropped to US$59,000 last week, marking the cryptocurrency market's second-most severe weekly drop of the year.

CNBC interviewed several experts to understand their predictions regarding the return of approximately 71,000 bitcoins — which is about 0.4% of the total 19.7 million bitcoins available — to those who were affected by Mt. Gox this week.

Pressure on Bitcoin could pick up

Mt. Gox, an abbreviation for “Magic: The Gathering Online Exchange,” was previously the biggest Bitcoin exchange worldwide, responsible for processing approximately 80% of all Bitcoin transactions in dollars.

In February 2014, when it closed, bitcoin had an estimated value of about US$600.

Now, the biggest cryptocurrency in the world is valued at approximately US$61,000 for each coin. This implies that individuals choosing to receive payment in cryptocurrency, instead of in traditional currency, have experienced a 10,000% increase in the worth of their holdings over the past ten years.

John Glover, the head of investments at the crypto loan company Ledn, mentioned to CNBC that the unexpected profit for Mt. Gox customers would probably lead to significant purchases of Bitcoin, as investors seek to secure their profits.

“Many will cash out and enjoy the fact that having their assets stuck in the Mt. Gox bankruptcy was the best investment they ever made,” Glover, who previously served as a managing director at Barclays, made this statement. “Some will choose to take the money and run,” added Glover.

James Butterfill, the head of research at CoinShares mentioned on CNBC, stated that the nearly US$9 billion worth of bitcoins that are about to be available has “long been a concern for those with bullish views on bitcoin.”

″Consequently, the market is highly sensitive to any related news. With the announcement that the Trust will begin selling in July, investors are understandably worried,” stated Butterfill.

This wouldn't be the first instance where Bitcoin's value fluctuated due to large withdrawals from centralized trading platforms.

In the past month, the crypto platform Gemini has successfully reclaimed over US$2 billion in bitcoin from its users, who had their funds held up in its Earn lending scheme. This represents a 230% recovery following the surge in bitcoin values, which more than tripled since Earn withdrawals were halted on November 16.

JPMorgan experts believe this was due to a downward trend in bitcoin prices, indicating in their research document a week ago that it's likely due to this factor “fair to assume that some of Gemini creditors, which are mostly retail customers, have taken at least partial profits in recent weeks.”

In the same way, analysts at JPMorgan anticipate that Mt. Gox clients are likely to sell a portion of their bitcoins to capitalize on significant increases in value for the cryptocurrency.

“Assuming most of the liquidations by Mt. Gox creditors take place in July, [this] creates a trajectory where crypto prices come under further pressure in July, but start rebounding from August onwards,” they wrote.

Separately this month, the German authorities sold 5,000 bitcoins, or around US$305.8 million at today's exchange rates, out of a 50,000-coin stash that had been confiscated about the Movi2k movie pirate operation.

According to blockchain intelligence company Arkham Intelligence, the money was transferred to numerous cryptocurrency markets, such as Coinbase, Kraken, and Bitstamp.

Experts believe that the selling of cryptocurrencies has also affected the value of Bitcoin.

Mt. Gox clients anticipated to retain their Bitcoins

Many experts concur that the decline in bitcoin is expected to be limited and brief.

“I think that sell-off concerns relating to Mt. Gox will likely be short-term,” said Lennix Lai, chief commercial officer of crypto exchange OKX.

“Many of Mt. Gox’s early users, as well as creditors, are long-term bitcoin enthusiasts who are less likely to sell all of their bitcoin immediately,” He mentioned that past sales by authorities, such as the Silk Road case, did not lead to a prolonged, severe decrease in prices.

Butterfill suggested there’s enough market liquidity to cushion the blow of any possible mass-market sell action.

“Bitcoin has maintained a daily trading volume of US$8.74 billion on trusted exchanges this year, suggesting that liquidity is sufficient to absorb these sales over the summer months,” stated Butterfill.

Jacob Joseph, a research analyst at CCData, believes that the markets can handle the selling pressure.

“Moreover, a healthy part of the creditors are likely to take a 10% haircut on their holdings to receive the repayment early, and not all holdings are set to be liquidated on the open market, reducing the overall selling pressure,” He mentioned.

Latest fluctuations indicate that the short-term effects of the Mt. Gox redemption could already be considered as part of the forecast, Joseph noted.

Galaxy Digital’s head of research, Alex Thorn, believes fewer coins will be distributed than people think, meaning there will be less sell pressure than the market expects.

However, he also wrote in May that, even if only 10% of the bitcoin distributed is sold, “it will have a market impact.”

“Most of the individual creditors will have their coins deposited directly into a trading account at an exchange, making it extremely easy to sell,” Thorn stated.

Vijay Ayyar, who leads the consumer expansion efforts in Asia-Pacific at the cryptocurrency trading platform Gemini, mentioned that the total effect of the Mt. Gox payout is expected to be "dissipated," considering the diverse groups that will receive the money.

On one side, some personal investors will receive their bitcoin immediately. Meanwhile, there's a "significant amount" of bitcoin that will be distributed among claims funds, Ayyar mentioned.

“Those funds would then need to distribute these out to their LPs [limited partners], hence the whole process could take a while adding a time element to the impact on price,” He mentioned to CNBC.