Tech Nomad Notes
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Tech Nomad Notes

A huge arbitrage discrepancy — the evidence of exchange’s upcoming death?

Originally posted at

By Vasily Sumanov & Olga Grinina

A hidden legend of cryptocurrency exchange market

Many of Bitcoin earlier enthusiasts surely heard of BTC-E — one of the oldest BTC exchanges opened in 2011, way before Bitcoin reaching today’s highs both in terms of trading and popularity. For quite a long time the exchange has remained an important player first for the BTC / fiat exchange market, and later for other emerging cryptocurrencies, until its rapid collapse in early 2017. The collapse was rather notorious involving the US law enforcement agencies with a serious charge of money laundering worth of 4 billion US dollars. Despite such a sad turn of events, as well as the significant loss of funds by the users with fiat accounts of the exchange being arrested, the exchange was bought out and rebranded to reopen under a new name — WEX — together with a promise to pay the lost funds to the users out of the exchange’s profits by virtue of emitting specifically designed ‘debt tokens’. Curiously enough, neither WEX interface, nor functionality has ever changed since 2012, which could probably make some users reminiscent about the good old days when Bitcoins were hundreds of times cheaper than now.

It suddenly happens: a huge arbitrage gap

And things were really going pretty well for WEX — until last week. Around July 4 BTC exchange rate has rapidly started to vary from trades at major exchanges like Bitfinex, HitBTC and Bitstamp (we analyzed the exchanges that trade BTC to US dollar):

BTC/USD exchange rate at WEX ( at 5pm on July 8, 2018

At the same time BTC price at these major exchanges is about 10% lower, therefore we identified the exchange rate ‘overshoot’ at one specific exchange — WEX:

BTC/USD exchange rate at Bitfinex, HitBTC, Bitstamp according to 17–00 08/07/18

An unusual activity was spotted at USD/USDT market as well. US dollar at WEX to ‘the world’s tokenized dollar’ demonstrated a ridiculous 1.139 USD/USDT, i.e. 1 USDT is almost 14% higher than the internal WEX dollar. That probably made many users (including yours truly) question the security of their funds and think of switching to another crypto exchange to convert their crypto.

So, what really happened at WEX?

Let’s try to investigate a little bit more into the whole WEX situation. Why did it happen in the first place? Can such a huge discrepancy in exchange rates linger on at the global market providing the opportunity to make crazy profit for adventurous traders? Indeed, it seems easy to buy bitcoins for $6800 at some ‘neighbor’ exchange, say at EXMO, that has pretty much the same operating ways of fiat withdrawal, then sell it at WEX for $7600 making crazy $800 profit (~10%) and withdraw the money. This could be done in circles until the exchange rates even out. However, in reality such an endeavor is losing its charm, simply because WEX withdrawal is a bit too expensive at the moment amounting up to 15%:

However, if we calculate BTC price in USD setting the two ‘neighbor’ exchanges in terms of trade volume as an example, it turns out to be pretty much the same: about $6849 as of now. What’s could be the reason for such a huge discrepancy in assets USD value? Also — why did WEX increase the withdrawal commissions so rapidly compared to other exchanges? EXMO’s commission, for instance, amounts to 1–3%.

All the possible scenarios are now probably coming into one: the exchange is likely to have lost the part of their capital. Such a situation may lead to the funds deficit only in one case: if there is a massive outflow of clients’ deposits. Which is quite possible, taking into consideration the rumor about WEX acquisition by a group of individuals associated with Ukrainian self-proclaimed republic. WEX is denying this outburst, having recently made the partial buy-out of user debt liabilities that it inherited from their predecessor BTC-E.

Yet, the facts and graphs are saying that the exchange is operating in a bit unusual mode experiencing fiat deficit, which means that the amount of current funds exceeds the amount at fiat accounts. Therefore, the fiat funds — US dollars, euros, etc. — cannot be fully withdrawn. The management has probably set extremely high commissions trying to limit withdrawals (or to get some extra funds from users at each input-output funds circuit). However, the users didn’t find particularly appealing to input funds to buy BTC at overshoot price, and the ‘WEX dollar’ price at online exchangers has evened up with USD equivalent. In fact, the mostly affected WEX users are now those who were storing fiat balances at the exchange before the price skyrocket: now they can withdraw their money with ~10% loss (both by virtue of buying BTC 10% higher and by losing the same percent when withdrawing fiat funds). We might be speculating about the roots of this deficit at WEX even further, however for now only one thing remains clear: this is surely a red flag.

Could WEX be repeating Mt.Gox’s destiny?

Oddly enough, WEX case is by no means unique. Cryptocurrency exchange market is beset by a string of bad news every month — whether it be the hack, scam or closing down, with damages surpassing the previous ‘records’. An ultimate classics here is probably Mt. Gox bankruptcy. Ironically, it is BTC-E that is being accused of bitcoin laundering stolen from this exchange! Back in 2013 Mt. Gox was one of the leading crypto exchanges storing more than the half of transactions in bitcoin network as well as the world’s turnover of USD market for the first ever cryptocurrency. The exchange has lived through the array of trials and tribulations, however, there was something it couldn’t cope with in the end: the hole in the balance supposedly caused by the blocking of fiat funds. It turned out later that a significant amount of bitcoin was stolen too. Mt. Gox was experiencing the issues with deposit withdrawals from spring 2013, and by late 2013 it turned into a hot-button forcing the exchange to take down the website in January 2014. There are several versions explaining the incident, one of them being that the bitcoins had been stolen way before the closure, which is confirmed by the scrutiny of the exchange’s BTC wallets transactions.

Curiously, the discrepancy between BTC rate at Mt.Gox and other exchanges occurred when there was lack of fiat withdrawal funds. Sounds familiar, huh? By the way, BTC price graphs from 2013–2014 compare BTC prices against BTC-E:

Mt.Gox trade graph in blue, BTC-E trade graph in red.
BTC price discrepancy curve (arbitrage discrepancy) at the two exchanges

The users realized that it was no use waiting for the fiat funds withdrawal and forced to buy out BTC at whatever price. And due to the issues with fiat input/output, the arbitrage discrepancy couldn’t be closed. As a consequence, the exchange rate at Mt.Gox dropped down to zero:

Possible impact on today’s market

Contrary to Mt.Gox times, the reality today is that the fall even of a major exchange is very unlikely to lead to serious and lengthy global impact. Hence, the closure of BTC-E in July 2017 didn’t have that much effect on the industry. WEX exchange has a rather modest daily trade volume (around $20 million) taking up the 42nd place in the global rating, and its cease of operation could even remain unnoticed.

Yet, WEX-like exchanges have historically appeared as providers of some unique services, like instant withdrawals by virtue of electronic codes and rare trading pairs like USD/USDT. Such a ‘boutique approach’ is in fact found at a very limited number of exchanges. A conceptual peer to WEX in terms of functionality (multiple options for fiat input/withdrawal, promo codes and vouchers, etc.) is probably EXMO exchange. This one, however, is more technologically advanced and has not been busted in any of money laundering / security breach episodes.

On a large scale, the crypto market life cycles are pretty similar to those of global empires that are created to be taken down later by stronger counterparts. With WEX going down the annals of history, another big episode will be over, which is quite logical: 2018 brings about new heroes. Still, isn’t it ironic that the journeys of Mt. Gox and WEX — the two exchanges created at the dusk of crypto history with high chances of one probably laundering the money stolen from the other — have ended up in such a similar way?



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