So, a theory emerged today that the bankruptcy trustee for the Mt. Gox settlement Nobuaki Kobayashi dumped a portion of their Bitcoin over the last few months, and that has caused the crash in price we have seen lately. The news of the sale was confirmed by Kobayashi in a meeting on Wednesday. Later, Twitter user @matt_odell documented the transfers to the exchanges, but not the actual sales of the Bitcoin.
However, I think a main issue that has been lost in all of this is how the exchanges themselves and their close partners used the knowledge of these transfers to dump Bitcoin themselves, and it was this dumping that caused the real sell off in the rest of the market, not just the Mt. Gox bankruptcy settlement sales.
It is widely known that exchanges have a close circle of large investors or “whales” that they cater to. They give these whales special treatment and most likely, special information that regular traders do not have access to. This is clearly insider trading. In fact, even in regulated markets this turns out to be such a problem that it was reported recently here in The Economist that the problem is so bad they described it as pervasive and widespread. It’s so blatant in fact that a shareholder in Bitfinex, Zhao Dong also admits to trading on the platform. So people like this obviously had access to orders coming in, and transfers such as the one from the Mt. Gox trustee. Now, just to be clear, I am not saying Zhao Dong or Bitfinex had anything to do with what happened, but the point is to illustrate how easy it is for insider information to be used by those close to the exchanges and given to whales and other VIP traders.
My thinking is that the exchanges that received the large transfers must have looked into where they were coming from and instantly knew they were from the trustee looking to liquidate the holding in the Mt. Gox settlement as required by a judge. It’s also possible they were told by the trustee himself when setting up the account as has been shown here. Using this inside information that a dump was likely to happen soon, the exchanges themselves starting selling off positions as well as alerting their close friends and whales of the situation. It was this chain reaction sell off caused by the inside of knowledge of seeing the large transfer of BTC from the Mt. Gox trustee.
The reason I believe this to be true is that the sales alone from the Mt. Gox settlement should not have caused such a long and sustained drop. Although crypto markets do have a liquidity problem, I don’t believe it is that bad to where it can’t absorb orders such as this. No, instead, when the exchanges saw this large deposit being made, they knew where it was coming from and knew it was a dump, so they started selling as well. It was the combined efforts of both of this selling action that caused the market reaction. Basically, the exchanges and insiders sold BEFORE the Mt. Gox Trustee had a chance to dump his coins.
**Next, we have Charlie Lee who shocked the crypto world by selling all of his Litecoin holdings. The news of that came out on December 20th, 2017 where he announced over the last few days he had sold all of his Litecoin. The first transfer of the Mt. Gox Bitcoins was on December 18th, just days before he announced that he had sold. The timing of this leads to the question as to whether Charlie Lee was one of the insiders who knew about the Mt. Gox dump. Either way, as more information comes out, the sale by Charlie Lee keeps looking like one of the more perfectly timed trades in crypto history.
**Editor’s Note: Charlie Lee contacted me regarding the above paragraph and vehemently and categorically denied he had any previous insider info on the Mt.Gox coins or anything else for that matter that would lead to a crash in price of BTC or LTC.
Of course, this is all speculation at this point. And only an investigation by a government body would be able to prove or disprove it, so it will remain speculation. But upon looking at how all this played out, it is the most likely scenario. And that is that insider information was shared among whales and large traders that the Mt. Gox settlement of Bitcoins were about to be dumped on the market, and using this information, they themselves sold off some of their holdings before the dump.