Cycle capital: Analysis of repayment pressure in Mentougou

Original author: duoduo, Cycle capital

Mt. Gox Bankruptcy Case

MtGox was established in July 2010 and was the largest exchange in the cryptocurrency world at that time, with trading volume exceeding 80% at one point. In 2013, MtGox was hacked, losing 850,000 bitcoins, which led to its bankruptcy. Subsequently, about 200,000 tokens were recovered. Since 2014, a lengthy compensation lawsuit has been underway involving these 200,000 coins, with investors and court-appointed trustees participating. Approximately 60,000 BTC were used for various fees, leaving around 140,000 BTC.

Debt Trading

After the incident, institutions have been acquiring MtGox's debts during the long wait for results, and personal debt trading has also been common. For example, in 2019, Fortress Investment Group widely sent out inquiries to creditors, offering to buy BTC at a price of $900, which was double the price of bitcoin at the time of MtGox's bankruptcy. The price of debt trading fluctuates with market conditions; original creditors who are concerned about not being repaid can recover part of their principal by selling their debts.

Compensation Plan

In 2021, MtGox introduced a compensation plan, allowing creditors to recover the remaining value of the exchange.

According to the compensation plan, since the stolen assets cannot be recovered, MtGox can only compensate creditors with about 23.6% of their original claims. If creditors choose to accept a one-time early compensation, there will be a discount, with a compensation rate of only 21%; if they do not accept, they may have to wait a long time, and the final compensation could be more or less. Currently, the proportion of creditors who have not found a one-time early compensation is unknown.

The compensation assets consist of two parts: one part is cash, derived from the BTC sold by the Japanese government during the peak in 2017, and the other part is BTC. Cash accounts for 5% - 10%, while BTC accounts for 90% - 95%, with specific ratios available for selection. It can be seen that over 90% of the compensation is in BTC.

Regarding the compensation timeline (which is also when BTC enters the market), it may take two to three months. A total of five exchanges will accept BTC from MtGox for repayment, which will then be distributed to creditor accounts. Each exchange has a different timeline: Kraken requires 90 days, Bitstamp 60 days, BitGo 20 days, and both SBI VC Trade and Bitbank will complete payments within 14 days. This is the maximum time and may be completed earlier.

Additionally, the deadline for accepting one-time early compensation is October 31, 2024. This date will not be modified unless approved by the court.

Current Progress

In May 2024, BTC from MtGox's cold wallet moved for the first time since 2018, causing market panic. On July 5, 2024, 47,000 tokens were moved from the MtGox account, with 1,545 BTC transferred to Bitbank for compensation. On the same day, the German government also sold BTC, causing a maximum single-day drop of over 8%.

As of July 12, 138,000 BTC remain in MtGox's account, indicating that the selling pressure from MtGox has not yet actually entered the market. The drop on July 5 was part of the market's anticipation of MtGox's selling pressure.

Figure: MtGox account balance

Figure: Recent transfer records of MtGox account

Selling Pressure Analysis

MtGox creditors will sell some BTC, but they are unlikely to sell all of it.

From a profit perspective, at the time of MtGox's bankruptcy, the price of BTC was $485. For original creditors, based on the current price, BTC has increased by 120 times; the amount of BTC compensated by MtGox is about 20% of the original holding, resulting in a profit of about 24 times. Even for debt acquirers, there is a profit of over 10 times; moreover, these acquirers may hold more BTC and are optimistic about BTC in the long term, so they will not sell everything.

From the holders' perspective, during the lengthy litigation process, the widely existing debt trading market has provided ample exit opportunities for paper-handed creditors. Those willing to buy debts are more likely to be long-term holders of BTC.

Assuming that 75% accept the one-time early repayment, the total BTC repaid would be 105,750, with a discount of 11%, resulting in 94,117 BTC actually used for repayment; and assuming selling ratios of 30%, 50%, and 70%, as well as selling times of 1 to 3 months, the number of BTC sold under different scenarios can be calculated. The table below shows:

What impact would such supply have on the market? We can further analyze it by referencing the recent BTC supply caused by the German government and the demand for BTC ETFs during that period.

Comparison of Market Impact from German Government's BTC Sale

Starting from June 19, the German government began to sell its 50,000 BTC through centralized exchanges. As of July 12, there were 6,394 BTC remaining in its address, meaning that approximately 43,700 BTC were sold in 23 days, valued at about $2.4 billion based on a price of $55,000.

During this period, the maximum daily drop was about 19% (from 66,400 to 53,500), and the daily closing drop was about 14% (from 64,800 to 55,900). The largest single-day drop occurred on July 5, when MtGox transferred 47,000 tokens (of which only 1,500 entered exchanges). Under the dual pressure, BTC dropped to 53.5K on July 5, with a single-day drop of 8.5%, marking the lowest point of this decline. After July 6, BTC rebounded, reaching around 59,500.

Combining the situation of the German government's token transfers, it is clear that the market's expectation of a price drop due to token sales precedes the actual sale time. When the German government began to gradually transfer BTC, the market continued to decline. From June 19 to July 7, over 18 days, the German government sold about 10,000 BTC, averaging 556 tokens sold per day. On July 5, after the dual pressure from the German government and MtGox, the actual selling pressure from the German government increased, but the market's absorption capacity also strengthened. On July 8, the German government sold nearly 13,000 BTC, and the market did not break the previous low, showing an upward trend in daily closing prices. From July 8 to July 12, the German government released about 33,700 tokens, with BTC oscillating between 54K and 60K.

Figure: BTC outflow from the German government (as of July 11)

BTC ETF Demand Analysis

BTC ETFs are currently a relatively stable buyer in the market. During the German government's token sale period, from June 19 to July 10, there were 15 working days. During these 15 days, ETFs had net sales on 6 days, selling $470 million; on 9 days, they had net purchases of $1.07 billion, resulting in a net inflow of $600 million, with an average daily value of $43 million. The main buying occurred after July 5, totaling over $800 million in purchases.

As mentioned above, the German government sold a total of 40,000 tokens during this period, worth about $2.4 billion. Therefore, the demand from BTC ETFs was insufficient to provide adequate support, leading to a drop in market prices.

Table: Daily net inflow of BTC ETFs (June 20 to July 10)

Conclusion

If MtGox's compensation is sold out within a month, the selling pressure faced by the market will be highly similar to that of the German government's sale, with comparable quantities and timing of sales. Based on the current demand for ETFs, it cannot provide sufficient support, and the price of BTC may further decline.

If MtGox's compensation lasts longer (2 to 3 months), the daily amount of BTC entering the market will not be particularly large, preventing a one-time drop. However, due to the ongoing expectation of selling pressure, there may be a period of oscillation to digest the sell orders. This also means that a major upward wave is unlikely to occur in the short term.

Currently, only 1,545 tokens from MtGox have actually entered exchanges, while the remaining tokens are still in MtGox's account, indicating that the actual selling pressure has not yet entered the market. When the BTC held by MtGox is distributed on a large scale to several exchange addresses, it may trigger significant panic selling, resulting in a sharp drop. In contrast, individual sales may not lead to a significant price decline due to their dispersion and difficulty in tracking and observing.