What SHOULD we Learn From the Bitfinex/Tether Story?
Late last month, the NY Attorney General filed a lawsuit against the parent company of Bitfinex and the Tether stablecoin (USDT), alleging that they illegally diverted funds to cover undisclosed losses incurred due to issues at a payment processor utilized by the exchange. The story has captured people’s imaginations, with a lot of media coverage and accusations from critics and supporters of cryptocurrency alike. Despite this coverage, there has been precious little analysis of the market’s reaction to the event, nor has there been much commentary on the serious issues with Bitcoin pricing that has been exposed by the market reaction.
Simply put, popular websites and various pricing services that use arbitrary weightings of exchanges often display inaccurate data to investors, but the differences have been accentuated by what happened on the Bitfinex exchange. Before looking at the price action on the day of the announcement, it is worth noting that, for the previous several months, there was a premium paid on Bitfinex by US Dollar buyers of Bitcoin. That premium ranged from $50 to $100 per Bitcoin, presumably to account for the withdrawal fees that Bitfinex had imposed upon US Dollar withdrawals. The impact of that premium has meant that popular websites such as CoinMarketCap and CryptoCompare have consistently displayed a Bitcoin price that is higher than the actual price available to investors. On the 25th, however, after the lawsuit was announced, that premium expanded.
As one can see from the price chart above, the premium paid on Bitfinex expanded to almost $300 within several hours after the lawsuit was announced. That premium continues to exist, as one can see from this real time snapshot taken on May 5th.
Presumably, investors with US Dollars on the Bitfinex exchange are quite concerned about their ability to access their dollars, as that is the only reason I can think of for people to be willing to pay such a premium. This is noteworthy as Bitfinex is currently planning a new Token offering of $1 billion that would address their capability to allow withdrawals.
Unfortunately, there is a significant side effect of the premium being paid on Bitfinex. The price of Bitcoin, as reported on sites including CoinMarketCap and CryptoCompare were consistently $100 too high since the lawsuit was announced. Those sites use reported volumes to calculate their prices, and I can only assume that Bitfinex trades are averaged in somehow. (If they did not use averaging, then the price would bounce $300 every time they print a trade, so it seems likely.) The problem, of course, is that no investor can actually achieve such an average price, as there is no way to sell on Bitfinex, without taking on the risk that one’s dollars would get “trapped” there. (Besides, Bitfinex does not accept accounts from US clients, so there are quite a few investors that cannot even trade there if they wanted to.) POSTSCRIPT — As of recently, CoinMarketCap announced that they were excluding Bitfinex prices,
But the price they report is still over $65 higher than CoinRoutes RealPrice, so they must be including Bitcoin-USDT prices. More on that later.
This issue, for those who have been paying attention to commentary from the SEC, contributes to their concern that the price of Bitcoin is unclear to the investing public. That concern is one of those that they list when considering the Bitcoin ETF, which makes it important to the entire crypto industry as well.
In addition to the impact on Bitcoin pricing, the market movement which occurred after the event deserves an in-depth look. So, let’s look at the price movements that took place on the day of the lawsuit. The following chart shows the CoinRoutes Consolidated Best Bid and Offer for Bitcoin (vs USD) for the 25th of April through the 26th surrounding the event. This particular chart includes the data from the five major exchanges that accept US clients that trade the Bitcoin USD pair. As one can see, when the lawsuit was announced, the price of Bitcoin plummeted by over 10% within a few minutes on some of the exchanges.
It is very interesting, however, to zoom in to the price action immediately after the suit was announced. As one can see from the graph below, participants on some exchanges reacted much quicker than on others. For a period of over 20 minutes there were bids on one exchange at prices over $300 higher than the offers on others.
I have not seen much commentary about this 20 minute period, but it clearly shows the absolute necessity for serious traders of crypto to have access to consolidated data products and trading algorithms. It also points out the serious deficiency of current markets to ensure clients achieve “best execution,” due to their isolation from one another. Clients of CoinRoutes, however, would have avoided selling too low or buying too high, by utilizing consolidated data. Investors without that data, on the other hand, were exposed to the potential of significant losses.
In addition to the Bitcoin price action immediately following the announcement, it is also interesting to look at the reaction in the USDT (Tether) market. Presumably, the lawsuit should have had more direct impact upon Tether, considering that it called into question its very viability. While the price of USDT did drop by over 4% in the initial drop, it stabilized down 3% within 20 minutes. This was much less than the 10% that Bitcoin dropped in the same time period.
Over the subsequent week and a half since the announcement of the lawsuit, Bitcoin has recovered and its price has actually eclipsed the price level it was trading at before. Tether has also recovered 2/3rds of its price decline, currently trading at just under a 1% discount. As a result, Bitcoin trading in US Dollars trades at a 1% discount to where it trades vs Tether.
There is nothing wrong here, and, in fact, this pricing relationship proves that market participants act to keep prices in line with “pure” arbitrage opportunities when they are able to do so. Unfortunately, however, it is also important to understand that there are pricing sources that conflate the price of Bitcoin in USD with that of USDT. This likely explains the premium shown on CoinMarketCap today, and also explains why their reported price was lower than the RealPrice several weeks ago, when USDT traded at a slight premium and the price of Bitcoin in USDT was actually lower than the price in US Dollars.
In conclusion, the events of the past couple of weeks have been very interesting for the prices and future prospects of USDT and Bitcoin. The most important lesson, apart from the extremely serious allegations against Bitfinex’s parent company, is that a consolidated view of pricing data provides a unique perspective on the structure of the market. That perspective, in turn, shows that there are many investors who are not achieving best execution or even have an accurate knowledge of the value of their holdings. Both, however, are readily achievable with the appropriate tools.
