Since 15 January 2015 Bitfinex credited tether (USDT) deposits 1:1 for USD but this parity ended on 27 November 2018 as Bitfinex introduced trading on the USDT/USD cross-rate. On 21 December 2018 the exchange introduced margin trading on that pair with up to 3.3x leverage. On 11 March 2019 they listed BTC/USDT but until then BTC on Bitfinex was effectively denominated in USDT. On 24 April the New York Attorney General (NYAG) office alleged that crypto exchange Bitfinex lost $850 million and subsequently used funds from the very closely-affiliated USDT operator company, Tether, to secretly cover the shortfall. A positive ruling in Bitfinex-Tether’s favour occurred 16 May 2019. The LEO token private sale took place between 24 April and 16 May and since the beginning of April this year tether supply increased by 50%. Taken together these events have some interesting implications for the price of bitcoin…..
The Figure below depicts daily (23:00 UTC) price spreads between Coinbase BTC/USD and four large centralised exchanges, all relative to the Coinbase price. Time series on Bitfinex and Poloniex are converted from USDT to USD using the Kraken USDT/USD cross-rate — this being the longest series available and having the largest (real) volume. Poloniex prices (green) move into line after adjustment, but Bitfinex prices (blue) deviate significantly since 27 November 2018. NB: Using those Bitfinex USDT/USD prices to adjust the Bitfinex BTC/USDT price (not shown in the figure) creates even greater deviations.
The decoupling of the Bitfinex BTC price occurred immediately after the 40% fall in BTC/USD between 13 November 2018 and 27 November 2018 — see the lower graph in Figure 1. On 27 November 2018 USDT/USD trading on Bitfinex commenced and on 11 April 2019 Bitfinex introduced margin trading on BTC/USDT. After this, between 24 April and 11 May 2019 the Bitfinex BTC traded at 4% premium to other exchanges. What happened then?
Let’s take a closer look. Figure 2 zooms-in on the Bitfinex spread since March 2019. Note the temporary decoupling of USDT/USD prices on Bitfinex and Kraken between 24 April 2019 and 11 May 2019 — exactly the period when BTC traded at a 4% premium, and also exactly the time of the NYAG investigation. Note that during this interval (and only then) the Bitfinex BTC/USD and BTC/USDT pairs were not arbitrage-free via the Bitfinex USDT/USD cross-rate (nor indeed via the Kraken USDT/USD cross-rate). Of course, one can only conjecture but Amun suggest the reason for the 4% premium is a ‘bankrun’ on Bitfinex — see reference below.
Furthermore, the NYAG allegations on 24 April and subsequent reprieve of Bitfinex on 16 May coincided with a leveling-off period of tether supply, when zero new tokens were issued — see lower graph in Figure 2. Moreover, Bitfinex issued a series of rapid-fire announcements between those dates as they created an ‘exchange token’ (à la Binance Coin) named UNUS SED LEO (LEO) offering 1 billion USDT worth of LEO for private sale in exchange for BTC, USD and USDT.
The private sale of LEO occurred between 8 and 13 May 2019, whereupon the Bitfinex USDT/USD cross-rate fell perfectly into line with the Kraken USDT/USD price for the first time since its launch (see middle graph). Also since the LEO sale ended BTC/USD and BTC/USDT Bitfinex prices became arbitrage-free, and have remained so since then.
Most alarming of all, the lower graph of Figure 2 shows an immense increase in the supply of USDT by more than 1.5 billion tokens since April — but this USDT supply is no longer through Bitcoin’s OMNI layer. It is mostly on Ethereum, and Tether have recently created USDT tokens on EOS and TRON, both with small supply at the moment. As of today USDT has more than 3.5 billion tokens — far greater than ever before. This increase has been accompanied by an impressive surge in BTC/USD prices across all exchanges. USDT issuance was significantly ramped up until the NYAG allegations. Then the USDT ‘printing presses’ fell silent until around 16 May 2019, and during this time there was a premium for BTC on Bitfinex compared with other crypto exchanges. What was so special about BTC bought on Bitfinex then? We also note an increased demand for USDT on Bitfinex, with prices below 1 USD on all other exchanges. Why this sudden interest in purchasing USDT? And from whom? Bitfinex itself?
The 3.3x leverage available in both directions on many Bitfinex rates, including pairs between USDT, USD and BTC potentially amplifies the price impact of increased demand for these coins. Also an unknown amount of USDT was used in the private sale of LEO, all going to Bitfinex, hence no need for new tokens to be issued during the NYAG investigation. Indeed given the NYAG allegations Bitfinex may have been seeking ways to take USDT out of circulation. But then on 16 May Bitfinex achieved a legal breakthrough in the case and very soon afterwards the USDT printing presses were at it again.
Our previous post in November last year provided compelling empirical evidence that USDT printing was used by Bitfinex to manipulate the BTC/USD price upwards during the fourth quarter of 2017. And until the current allegations are proved one can only conjecture — see also the excellent report from Amun.
We conclude that the crypto market is now entering its second tether bubble.
Carol Alexander and Michael Dakos
Crypto Asset Risk team, Quantitative Fintech Network (QFIN), University of Sussex Business School, United Kingdom.