Serious Allegations Against Bitfinex, Large Tether Theft, and Unusual BTC Fluctuations
After last week’s shenanigans, some of you might have breathed a big sigh of relief and collapsed back into your chair and things looked ready to settle down.
Well, if that was you, I hope at least you left your seat-belt on, because the crypto world doesn’t exactly have a “calm” setting.
In the last week, we’ve seen mounting accusations of insolvency against Bitcoin’s biggest exchange, yet another major cryptocurrency hack, and some unique trading opportunities materialize here in Korea and abroad.
Read on for the details.
We’ll start with the situation over in Hong Kong:
Bitfinex’s Past Troubles
For those you who have been living under a rock (or are just new to the scene), Bitfinex is one of the world’s largest cryptocurrency exchanges, with more than its share of the volume, and more than its share of past drama.
Last year, the exchange was the subject of a massive theft, as hackers ran off with 120,000 bitcoins, at the time worth approximately $72 million. No longer able to cover all its users’ funds, Bitfinex responded by creating BFX, an IOU token, promising to reimburse all tokens over time.
Despite widespread skepticism, Bitfinex proceeded to make good on those tokens, and gradually bought them back. It first occurred in slow increments, until in April of this year when all outstanding tokens were redeemed.
Pretty impressive!
Or was it?
Bitfinex Accused of Fraud
Not everyone, however, was totally convinced that the guys in Hong Kong had really been honest about their recovery.
A blogger under the pseudonym “Bitfinex’ed” has received growing attention as he claims to expose fraudulent actions taken by Bitfinex following the hack. In his more recent pieces, he accuses Bitfinex operations of being nothing more than a ponzi scheme. The assertion is that Bitfinex has relied on fraudulently acquired Tethers, a USD-pegged cryptocurrency.
Officially, Bitfinex and Tether are separate organizations, only connected by a partnership, where Bitfinex is one of several exchanges accepting Tether and offering a platform to trade it. If these recent allegations are to be believed, however, Bitfinex exercises control over Tether — enough to print off millions of unbacked Tether at their whim.
Furthermore, he claims that since Tethers are being used to purchase Bitcoin, this is artificially inflating the price of BTC, since all the new Tethers are being used to purchase Bitcoin.
At this point, it’s worth it to get into a bit more detail about Tether:
What’s the Deal with Tether?
Tether is a bit of an unusual cryptocurrency. Unlike most coins, it’s not aiming for moon. It’s content to stay firmly on the ground, pegged to the US dollar.
The idea is to provide a way to trade USD (with all of its stability) with all the benefits of a cryptocurrency. Basically, crypto-freedom without crypto-volatility.
So, how does the value of one Tether stay equal to one dollar? (Short answer is that it doesn’t, because there are price swings…but it does track it pretty damn closely, so how is that achieved?)
All new Tether are created by the Tether Company. They will create as many new Tether as someone is willing to deposit dollars into their bank accounts. The full amount will be stored in USD, and at any time, someone can redeem any amount of Tether back from the company for USD at a 1:1 ratio.
The problem is, as Bitfinex’ed pointed out, how do we know that there actually is enough USD in the company’s accounts to cover all existing Tether? A public audit would do it, but that hasn’t happened.
If Bitfinex’ed is to be believed, all the exchange did was exchange one type of unbacked IOU (the BFX token) with another (Tether)!
And it gets worse:
Tether’s Turn to Get Hacked!
Only 2 days ago, Tether acknowledged that 30 million of its tokens had been absconded from its treasury funds.
This would be a massive blow to the institution on its own, but the timing couldn’t be worse. The coin had recently come under scrutiny thanks to the Bitfinex allegations.
Exchanges have started to freeze deposits and withdrawals of the currency as its future looks bleak.
How Are Bitcoin and the Markets Weathering the Storm?
Is the king of crypto now dead? Well, if by half way through this article you ran to double-check if your BTC balance was worth anything, I wouldn’t blame you, but I have a feeling you may have come away reassured.
Which might seem odd.
The posts from Bitfinex’ed paint a pretty gloomy picture for Bitcoin, asserting that its current price is a bubble inflated by the Tether fiasco. Tether is primarily used to buy Bitcoin back, and it does have a tremendously high volume. It has 24h volume periods cracking half a billion dollars, regularly rivaling BCH or ETH.
But its aggregate value is still under $700 million. That might seem like a lot, but is less than 0.5% of Bitcoin’s whopping $140 billion market cap.
That’s not to say BTC wasn’t affected. After the news of Tether’s hack broke, instantly dived 6%.
But other oddities have shown up. South Korea, once the leader of the price run-ups is currently experiencing a discount on its BTC. That’s right, despite being the kind of Bitcoin premiums this year, Bitcoin costs less in Korea than the rest of the world, flipping the arbitrage opening on its head.
Whether that’s got anything to do with Bithumb’s issues from last weekend is as of yet unknown, but the unexpected trading opportunities keep popping up.
And how has Bitcoin been doing since the initially Tether-prompted plunge? Have we all gone broke? Well…not exactly:
BTC is back and presently breaking through all time highs, into the $8000's.
The market seems resistant to the fears of an insolvent Bitfinex, but who knows what the coming weeks will reveal?
Wherever this peculiar story leads, there will be trading opportunities abound, so keep your eyes peeled, and good luck!
