Fear, uncertainty, and doubt, or “FUD” in crypto parlance, are powerful emotions that can cause a run on a bank, or, in the case of the beleaguered crypto exchange, Bitfinex, a run on exchange deposits. The weekend has passed since last Thursday evening’s shockwave that iFinex, Bitfinex, and Tether might have been engaged in an alleged cover up of an $850 million fraud. Crypto values have stabilized, calmer minds have prevailed, and the management team, alleged to have been behind this commingling of funds debacle, have responded forcefully to the NY Attorney General’s accusations.
In case you have been on vacation without wifi or have been hanging out under a rock to pass the time away, the New York Attorney General, Letitia James, “revealed that Bitfinex purportedly sent $850 million to a Panama-based company, failed to secure the funds later, and went on to raid almost $1 billion of Tether’s cash reserves to satisfy its customers.” Cash reserves of a stablecoin venture are supposed to be sacrosanct, a fiduciary line that is never to be crossed by a management team for whatever reason.
The unregulated nature of the crypto industry, especially when an exchange is licensed out of the British Virgin Islands, can easily create situations where enormous piles of cash can be a tempting “siren” for temporary dalliances, if you will. There have been simmering suspicions that Bitfinex had been dipping into the cash reserves of Tether, but until now, there had been no hard evidence to support these speculations. Whether there now exists “hard evidence” is open for debate, but the damage has been done.
In the meantime, the executives at iFinex, the owner and operator of both Bitfinex and Tether, have published their response:
The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including, as to a purported $850 million “loss” at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released. Sadly, the New York Attorney General’s office seems to be intent on undermining those efforts to the detriment of our customers.
While the crypto industry may be taking the latest “black swan” in stride, clients of Bitfinex are betwixt and between. Per one source in the know: “Users of Bitfinex rushed to withdraw their assets, resulting in a mass exodus of a purported $100 million worth of BTC and Ethereum from exchange-owned wallets.” It is not unusual for rats to desert a sinking ship, but after the initial wave of withdrawals and transfers, depositors are now more or less on high alert, just waiting to act, but in order to do so, Bitfinex spreads have widened to such an extent that a BTC $350 premium is the cost.
Yes, Bitcoin is trading on Bitfinex around $5,500, while other exchanges quote roughly $5,150 as the current market bid price. If you wish to move your USDT or other altcoin from Bifinex, you will have to pay the piper. Why the difference and why don’t speculators rush into this obvious arbitrage opportunity? According to one opinion:
This premium has been chalked up to three factors: Bitfinex users’ fears that Tether is going to collapse, Bitfinex users’ propensity to withdraw their assets, and the value of USDT (Bitfinex’s USD pairs are denominated in USDT).
This pattern, however, is not something new. It has been seen before. Jeff Garzik, the co-founder of Bloq Inc., explains:
It’s exit buying. To get out of an exchange, one must buy “hardcurrency” – BTC – when fiat withdrawal methods start failing. The BTC price is therefore higher at dying exchanges. We’ve seen this data pattern many times in past crypto history, including but not limited to MtGox.
There is a silver lining in this “Bitfinex” cloud over Crypto-Land. Critics were quick to pounce and shout that Bitcoin would surely drop below $4,000, as they had proclaimed from on high months ago… but it did not happen. The crypto industry, though shaken, demonstrated remarkable resilience. Investors did not exit stage left. The savvy ones understand how markets truly work. Fundamentals are strong at the moment, and, knowing this fact, they are not about to abandon ship, as other rats might be prone to do.