Debunking the Mt. Gox Dumping Myth Entirely

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Perhaps the most absurd theory that’s been thrown around the cryptocurrency world in the past few days is that the most recent depreciation in price of Bitcoin is due almost solely to the Mt. Gox ‘sell-off’.

Above is a picture of the recent drop in price over the previous seven days from the time of writing. The price dipped approximately 27.23% from its previous spot price of approximately $11.7k down to a price as low as $8,400 at one point in time. Currently, at the time of writing, it is trading at $9,047 per Bitcoin on the Bitstamp exchange, which still represents a total depreciation of 21% over the last seven days.

According to many in the crypto community, this is due almost entirely to the ‘sell off’ of Bitcoins by Mt. Gox.

Source: https://www.newsbtc.com/2018/03/11/bitcoin-price-will-likely-surge-as-mt-gox-sell-off-paused-until-september/
Source: https://www.usethebitcoin.com/how-will-bitcoin-react-to-mt-gox-sell-off-pause-until-september/

Anyone reading these headlines might be inclined to believe that the Mt. Gox sell-off had such a substantial impact on the prices that it was solely responsible for the downturn itself.

In the absence of common sense, logic, and an alternative/opposing viewpoint, this theory could seem plausible.

What’s ‘Mt. Gox’?

Mt. Gox was one of the very first mega-exchanges in the cryptoworld. At one point in time it was responsible for more than 80% of all trading involving Bitcoins. Given the primitive nature of Bitcoin around the time that Mt. Gox was at its height (2011–2014), it was essentially a pillar in the community.

What Went Wrong?

Around late 2013, rumors of insolvency started buzzing following a Mt. Gox hack. However, despite the warning signs and red flags that were going around the community, many continued to trade regardless. It certainly didn’t help that Mt. Gox has went through painstaking efforts to reassure investors that they were entirely solvent and that customer funds were at no risk of being lost.

The company’s original statement was, “A bug in the bitcoin software [that] makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a bitcoin wallet did not occur when in fact it did occur. Since transaction appears as if it has not proceeded correctly, the bitcoins may be resent. MtGox is working with the Bitcoin core development team and others to mitigate this situation.”

Shortly thereafter, the exchange collapsed entirely in February of 2014, resulting in aloss of 750,000+ bitcoins when everything was said and done. This number represents approximately 3.5% of all Bitcoins that will ever be created. So, to say that this loss devastated the community is an understatement.

What’s the Point?

Long story, short — investors were pissed and heads rolled, because no entity is going to get away with losing that much money without there being significant backlash from both the community as well as governments.

So, one of the bankruptcy trustees, Nobuaki Kobayashi, who is responsible for handling Mt. Gox’s fiduciary responsibilities to the individuals that lost money, was tasked with the responsibility of aggregating enough funds to compensate the investors that had lost tens of millions due to Mt. Gox’s negligent handling of their exchange. In order to pay these investors back, he has sold off hundreds of millions of dollars of Bitcoin in recent weeks in order to allegedly pay back the individuals that lost their money in the Mt. Gox breach.

(Sidenote: Since Bitcoin is considered an asset in the eyes of the governmental jurisdictions that preside over Mt. Gox’s creators/owners, investors that lost money could have a plausible argument that they should be receiving the equivalent product if it is available to be given — i.e., Bitcoin itself and not the equivalent exchange value at the time that the hack happened).

Here’s the Theory

So, the theory that the Bitcoin community has put forth in recent days/weeks is that the selling of this substantial number of Bitcoin by those in power at Mt. Gox has essentially ‘flooded’ the market and depressed the prices to such an extent that it resulted in the bear run that we are currently experiencing (at it’s lowest, Bitcoin has lost over $13,000 from it’s previous high value of $19,500+/bitcoin).

Unfortunately, Cointelegraph was one of the main purveyors of this absurd theory in one of their most recent articles. So, in order to assess the merit of this argument, it’s best that we view the contents provided in their entirety:

As reported by Cointelegraph, there was an overall appreciation in Bitcoin’s price in the 24 hour time-frame that the time the first batch of 6,000 Bitcoins were allegedly ‘dumped’ on the market on December 22nd. However, the subsequent decline in price following the alleged ‘dump’ (tracked via wallet transfers — we don’t know the exact time that any of these coins were sold) before this eventual rise, was not something that should be unexpected.

The chart above is a price chart for Bitcoin (USD) on the 12H time frame. A square is placed around the time frame that the alleged dump took place. As one can see, there was already a steady drop in Bitcoin’s price for several days before any dump occurred.

To use a bit of technical analysis here, the dump actually coincided with a strong reversal signal from the Williams %R indicator. Thus, if it was truly artificially deflating the price, the price action here as well as the signal from the indicator (divergence on the Williams %R) would not reflect the values that they are showing in the picture above.

Why?

Because the Williams %R, like the RSI, is a momentum indicator. This means that it is tracking the momentum of the price. Based on the mathematical formula that this indicator uses to display values, if the ‘dump’ of Bitcoin actually impacted the price that strongly, then it would not be diverging with the price (showing decreased momentum). The indicator instead, would have been pointing straight down.

This is an indisputable fact.

Here’s the next example that is provided of the alleged ‘dumping’ by Mt. Gox depreciating the price:

Once again, the statement posted within this article above the price chart has a few troubling logical inconsistencies. So, let’s unpackage this carefully:

“On Jan. 17, 8,000 Bitcoin was transferred from the same cold storage wallet that was used on Dec. 22 to the hot wallet at 3:28 a.m. At the time of the sale, the price of Bitcoin was $10,788.10. It is expected that Kobayashi received around $86.3 mln. At 10:24 a.m., the price of Bitcoin was $9,622.66.”

· The article alleges that the sale of this batch of 8,000 Bitcoins occurred nearly 7 hours after the hot wallet transfer was made. There is no evidence behind this claim other than a notable depreciation in the price of Bitcoin. Thus, it appears that the author is more a victim of confirmation bias than anything. I say this because the author merely assumed that any drop in the price of Bitcoin MUST be attributable to some sort of dumping. However, there is no objective evidence (increase in volume, momentum indicators changing, 24H trading volume, etc.) that would indicate that some sort of massive sell-off was occurring. We don’t even have a screenshot from an order book showing an 8,000 Bitcoin sell-order on any exchange. Wouldn’t this have been noticed by at least one user in the community?

Also, below are a few objective technical indicators that cast serious doubt on the ‘evidence’ presented above:

That bottom indicator with the red line is called Average True Range. This refers to the average volatility of Bitcoin. The value of the ATR reading at any given point in time represents the average fluctuation in price (i.e., an ATR of $832 means that the price, on average, fluctuates about $832 per period). At the time of the second alleged ‘dump’ on January 17th, the ATR was reading at a value of $1,541.30.

According to the CoinTelegraph, there was a depreciation of approximately $1,100 during this period, which is a depreciation in the price that is nearly 30% less than what the average volatility of Bitcoin’s price was during this period. So, the change in price was not inconsistent with the way that it had been behaving in recent days before the alleged dump.

Once again, the Williams %R (the second chart with the blue line ) seen above, shows a pronounced decrease in the downward momentum of Bitcoin’s price before, during, and after the alleged dump.

Once again, if the entirety of these coins were dumped at the time that the article claims and the result of this action truly caused a precipitous decline in Bitcoin’s price as proponents of this theory claim, then the indicators would reflect this action the same way that they do when pump and dumps occur on altcoins.

Above is a picture where the alleged ‘dump’ occurred (time is adjusted to account for the time zone difference — the author is in GMT-4; please note the time is approximate and not exact to the minute).

What you should pay special attention to is that the 24-hour volume of Bitcoin around the point of the alleged dump is at $17.953 billion. This value averages out to approximately $748 million worth of Bitcoin being traded per hour.

Given the fact that the market price was $10.7k, this equates to approximately 70,000 Bitcoin being traded every hour ($748 million/$10.7k).

According to the CoinTelegraph article, only 8,000 Bitcoin were dumped at this point. Thus, according to the data that we currently have before us, this wouldn’t even exceed the number of Bitcoins being traded in a 10-minute time frame during the time that the dump allegedly happened.

Is That All?

Here’s yet another point that refutes the theory:

Above is a zoomed-in screenshot of the 24H market cap volume (kudos to coinmarketcap.com) during the time before and after the alleged dump.

This 24H volume reflects the volume of Bitcoin being traded in the hours both before and after the time of the alleged ‘dump’ of the price (once again, please note that the times are adjusted to reflect the GMT-4 time zone that the author is in).

One can see a clear decline in the 24h Trading Volume.

This fact is yet another thing that stands in clear contradiction of the theory that the alleged ‘dump’ of Bitcoins by Mt. Gox caused a massive price depreciation in the price of Bitcoin, because the 24H trading volume would have increased if this were actually the case for two reasons:

1.) The influx of Bitcoin being ‘dumped’ on the market randomly.

2.) The influx of traders that would begin ‘panic selling’ as the price declined steeply and/or stop losses that would’ve been triggered by the alleged dumping.

The 24h Trading Volume gives us firm confirmation that neither of those events above occurred. And if #1 did occur, the impact was negligible at best.

Not Viewing the Rest of the ‘Examples’

I’m deciding not to cover the remaining three examples that were given in the article because the evidence provided to the contrary would simply be redundant at this point.

Summary of Why the Mt. Gox ‘Dump’ Theory is Completely Bogus

#1 — Why Would They Want to Crash the Price of Bitcoin?

This perhaps should be the foremost question on any person’s mind that is entertaining or perpetuating this theory.

What plausible gain would the Mt. Gox bankruptcy executive have in ‘dumping’ the Bitcoin all at once while the coin is already in a steep price decline? Any trader knows that ‘dumping’ on the market would, at the very least, cause some level of price slippage, which would result in a loss of profits that would have otherwise been gained if the coin were sold in a more distributed manner (i.e., 1,000 Bitcoins every hour or posting all of the sells at staggered prices).

#2 — The ‘Dump’ Times Make No Sense

As you can see in the charts above, there were numerous opportunities for the Mt. Gox bankruptcy executive to ‘dump’ the Bitcoin at a higher price. Why would they not do so? Bitcoin was valued at nearly $20,000 just weeks before.

Why would they wait until the value had depreciated by 40% ($20k to $12k) to start dumping?

#3 -No Objective Evidence Exists to Corroborate This Theory

All that is known is that the bitcoins were moved from a hot wallet. There is no way to track how many were sold and when. For all we know, not a single Bitcoin was sold. Thus, this theory is all built entirely on conjecture to begin with.

The theories that have been put forth assume that ALL of the Bitcoin moved from the hot wallet was simultaneously dumped. There’s absolutely no objective evidence or logic to support this notion in favor of a theory that they sold the Bitcoin in a controlled and measured manner.

#4 — Arbitrage

If the Bitcoin were all simultaneously dumped, then they would be dumped on one exchange. Thus, the process of ‘arbitrage’ would have covered the price here.

What is Arbitrage?

Let’s say you’re trading Ripple for $1.00 each on Bitfinex. Now, suppose you look over at Bittrex and notice that Ripple is going for 80 cents. What would you do? More than likely you’d attempt to buy as much Ripple as you can for 80 cents, then sell it for $1.00 on Bitfinex in order to make quick profits.

However, you wouldn’t be the only trader to make such an observation. So, as a result of you and others attempting to scalp profits from one exchange to another, the price of Ripple on Bittrex would subsequently rise due to the influx of buyers attempting to get a discounted deal on the token.

The price of Ripple on Bitfinex would also decrease because of the influx of those trying to ‘cash out’ their scalped tokens.

This happens everyday on crypto and traditional markets (its substantially more common in crypto though). Typically, trading bots that are designed to detect such opportunities, make these trades automatically, so the price between the two exchanges clears up quickly. And you can bet your last dollar that there are PLENTY of those bots in operation for Bitcoin.

So, in conclusion, even if the dump did cause a massive decline in the price

#5 — Bitcoin Mining

This may be one of the strongest, yet most overlooked counter-arguments to this entire theory. We’re forgetting about the miners entirely.

What Does Mining Have to do With Anything?

The only reason people mine is to get Bitcoin. As Bitcoin aficionados, we know all too well that the coinbase (not the company) reward for mining Bitcoin is 12.5 Bitcoins per block. It takes approximately 10 minutes for each block to be mined, with some level of variation.

So, there are approximately 75 Bitcoins awarded every hour (12.5*6 [one hour=60 minutes/10 minute blocks]). There are 24 hours in a day, so since 75 Bitcoins are mined every hour, we can estimate that approximately 1,800 Bitcoins are mined per day (24*75). There are seven days in a regular week, so since there are 1,800 Bitcoins mined per day, there are approximately 12,600 Bitcoins produced per week (1,800*7).

It is well-known that the process of mining Bitcoin specifically has become exorbitantly expensive over the past few weeks and months because of the influx of miners on the Bitcoin network in recent months. Therefore, it is more than likely that miners are consistently ‘dumping’ Bitcoins in order to pay for overhead costs, cost of equipment, absurd electric bills, and general living expenses.

Since the Bitcoin reward is the only way that miners receive compensation for their efforts (directly or indirectly), they cannot afford to “hodl” Bitcoin in the same way that the general population can because they need to liquidate down their incomes to live (most electric companies don’t accept Bitcoin as payment and landlords+grocery stores are also unlike to do so).

Therefore, a humble estimate would be that miners more than likely sell at least 4–5,000 bitcoin per week.

Please note: This doesn’t even account for the extra Bitcoin that is received in fees by the miners as well.

Indicators Strongly Show Otherwise

Above is an example of what the ATR (volatility tracker — oscillator) and Williams %R (momentum indicator like RSI) look like when an actual pump and dump is going on.

We should’ve seen something akin to what we see in the dump phase here, if that’s what was going on. However, we didn’t.

Conclusion

There’s just simply on objective reason to believe that the depreciation in Bitcoin’s price was a result of Mt. Gox in any way, shape or form. There’s simply zero objective evidence or logic that supports this theory.

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