As bitcoin and cryptocurrencies continued their fall over Sunday to Tuesday, on November 24th to 26th 2019, the premium of bitcoin prices versus the US dollar expanded significantly over Sunday and Monday, Nov 24th to 25th before slowly heading back to more “normal” levels on Tuesday. Our spread charts captured below the dollar premium of Bitfinex BTCUSD versus Bitstamp BTCUSD over this period:
The chart shows that the spread of Bitfinex prices relative to Bitstmap prices increased from about 35 USD (About 0.5% premium) to more than 100 USD – the blue line - (nearly 1.5%) in a matter of a few hours between Sunday and Monday morning (at least in Asia). Within 24 hours, the spread settled back around the 35 USD premium (see Black Lines).
In retrospect, this was a meaningful opportunity to make a profit buying and selling Bitcoin in two exchanges, and just waiting for the spread to revert to its mean.
More actionable was to simply arbitrage or spread trade the BTCUSD versus the BTCUSDT listings in Bitfinex itself and using leverage for this trade through its coin borrow facilities. See chart below:
Here, a user with some capital, or BTC/USDT transferred into Bitfinex would have been able to sell BTCUSD at nearly 100 points over BTCUSDT on margin, then closed out the positions around 35 points. For anyone interested in the step by step mechanics of this, please let us know on Twitter.
WHY DOES THIS SPREAD OCCUR IN BITFINEX?
Looking at the same time period, we examined BTCTUSD (A BTCUSD Proxy) versus BTCUSD in Bitstamp, and while, there is some spikes upward in the spread where BTCTUSD was momentarily more expensive than BTC in Bitstamp, spreads remained pretty much constant. So why does this BTC price premium occur in Bitfinex for a longer period and at higher premiums?
We believe that there are a couple components to the spread expansion.
1) Timing in a low liquidity period/weekend: there may have been a price pressure particular to Bitfinex especially given the price move, and trader’s lack of fiat mobility over the weekend to effectively arbitrage the spread to average levels until late morning on a business day Monday).
2) Liquidity-arbitrage traders not trading aggressively on Bitfinex because of the exchange’s risk perception on the exchange. (As you can see on the graph above, the BTCTUSD spread spike both in its timing and maximum levels were closed significantly faster and the spread levels only got to about a third of the maximum spread premium in Bitfinex – so traders were much more aggressive to bring this spread inline again).
At this point, it is important to have a bit of notes and understanding on Bitfinex’s risk perception in the public domain, to help determine if the risk of entering a spread such as selling the BTCUSD in Bitfinex versus say buying BTCUSD or BTCUSDT is worth its potential return.
Bitfinex Exchange Risk Premium and Counterparty Risk to Bitfinex
At Executium, we consider quite a few things when we decide to add an exchange to our trading execution platform, as considerable work goes into making sure that the API connections work smoothly. Ultimately, we must think whether these exchanges have staying power, offer decent transparency (or that there is enough transparency in the public domain) into their financial strength, along with analysis of an exchange’s market liquidity, slippage (such as commissions), product offering(s), and of course API connection quality.
Bitfinex was no exception to our analysis of having the exchange connectivity be part of our offering, and we’ll share a bit of what we have concluded about the exchange especially in terms of risk.
Bitfinex Bitcoin Price Risk Premium
We consider Bitcoin trading in an exchange trading at a persistent premium to other exchanges to be a risk to be worth investigating. For example, we remember that the now defunct Gatecoin exchange had bitcoins trading multiple percentage points above other exchanges and in retrospect this was a clear symptom of liquidity and ultimately solvency problems for them.
Bitfinex as exhibited a persistent premium in its price of Bitcoin and other coins versus fiat and deserves us to examine this closer. Here, also, we will also point out, that after Tether’s creation and redemption separation from Bitfinex, the price has been trading around 1 USDT to 1 Dollar (give or take) for a while, with some exceptions. For the sake of time, we will investigate the price of USDT versus USD as a rough proxy for the premium of coins relative to fiat, and below we will discuss each numbered area or event.
Also, to put this into context, for events 3-7, we have included a TUSDTUSDT chart from Binance so you can visualize the net effect:
So, we will go over these periods with our commentary here:
Point 1 (January 2019): This is a period where there was significant negative user experience in fiat withdraws after Bitfinex over the latter 2 months of 2018, processed more than 1 Billion USD of redemptions. As we know now in retrospect, there may have been pressure from liquidity and possibly solvency issues stemming from fund seizures from Crypto Capital. Premium spreads reach north of 5%.
Point 2 (February-April 2019): The situation seems to have abated from January but there is still a significantly noticeable (2-4%) premium of crypto-fiat pairs compared to other exchanges.
Point 3 (April end 2019): The New York Attorney General’s office files a civil lawsuit using the Martin Act relating to Bitfinex’s liquidity situation in relation to Crypto Capital related fund seizures and a loan agreement from Tether. Effecitvely, Bitfinex admits that there is a liquidity mismatch within its group. As you can see, the spreads spike as expected with such an event.
Point 4 (Beginning of May 2019): In order to solve the liquidity mismatch, Bitfinex, launches an initial exchange offering of the Unus Sed Leo coin, a coin that would be used within the Bitfinex exchange and seeks funding of 1 Billion US Dollars. Bitfinex announces that they are successful in raising these funds (and evidence such as Bitfinex BTC wallet influxes and price of LEO afterwards, points that this announcement is highly likely true).
Point 5, 6, and now 7
After this successful raise, the price of Tether normalized to around 1 USDT per 1 USD. Further, the Bitfinex crypto fiat premium relative to other exchanges also reduced to around 0.15-0.45% generally until recently besides the following times in Point 5, 6 and 7 – where the premium increases or spikes have coincided with rather violent drops in Bitcoin Prices. Overall, the Unus Sed Leo IEO raise, we believe, was a game changer in restoring confidence among Bitfinex users.
So, then we ask why there is still a small, but persistent, premium in Bitfinex crypto fiat pairs?
The answer lies in arbitrage, where arbitrage traders are mathematically would be unwilling to compress the Bitfinex premium below the friction costs incurred. These costs include commission (or risk taken for a maker order), withdraw fees from Bitfinex, and deposit fees elsewhere. We calculate that on average these costs add up to about 0.3%. Nor would an arbitrage trader do this for free, and adding a ROE component, this premium would be closer to 0.35%.
This chart shows the relative fixed friction costs that determine the minimum reasonable spread in Bitfinex.
We must recall, that at the start of this year, this premium was anywhere from 3-5%, and has been falling, from this start point, we can expect it to still take some time for the Bitfinex Crypto Fiat price premium to completely disappear. However, this small premium likely shouldn’t be any source for alarm.
Bitfinex - Public Domain Information/Web Reviews
Fortunately, due to press releases and internet commentary, we believe glean quite a bit of information about exchanges. Sometimes, one may be able to make solid inferences with what isn’t published as well (for example: the lack of complaints or a drop-off of complaints).
We did a simple Google search on was “Bitfinex Withdrawal Issues”, as we our concern implicitly from the crypto USD premium in the exchange.
What we failed to discover looking at the first two pages of history is any direct links since articles from May 9th and Reddit on April 29th. We would have to assume that fiat withdrawal functionality has been restored at the very least on some modified or limited basis, as it would be even more far fetched to assume that every user has given up withdrawing fiat from the exchange since the Leo issuance.
The most recent related link is the Oct 30th Article, “Bitfinex Cries Fraud as Crypto Capital Executive Indicted by US”, which actually should have some minor influence for LEO valuation (which we can explain in another article), rather than any direct reflection on Bitfinex.
Other Google searches yielded complaints on slower Fiat withdrawals, but other negative reviews were mostly pertaining to customer’s lack of understanding of margin trading.
Bitfinex Exchange Overview – Financials and Exchange Overview
Equity Valuation Transparency:
Part of its shares were packaged into a SPV at BnKtoTheFuture.com. There is significant information on Bitfinex’s financials, as a result of an equity issuance in 2018. As such, there is some insight to the valuation of the company.
The last known trade has been $3.55 on 175 million shares, valuing the equity of the company at 620 million US Dollars if this figure is used for price.
Revenues can quite easily be derived by burn of a token. 27% of revenue we believe is bought back and burned on an ongoing basis. Thus, implicitly, with about 17 million USD of tokens are estimated to be burned in a given year extrapolating from this chart, and at a 27% burn rate, we are looking at total net revenues of 63 million US Dollars.
Bitfinex in many of its pairs offer best in class liquidity. Even a looking at the www.coinmarketcap.com’s new analysis of liquidity below, Bitfinex is in the top 10 easily. We see no issues with the validity of market depth for many pairs and Bitfinex offers a truly unique mature P2P lending/borrow market for coins and fiat.
Risks – Legal Lawsuits:
The largest risks, or detractor, to Bitfinex is a series of lawsuits from various parties in the United States.
The most significant one in our opinion is the NY AG office’s civil suit to gain information from Bitfinex as requested. Currently, the suit is in appellate court, and Bitfinex has been able to secure a stay from the NY AG to obtain the records in contention.
We believed in terms of the liquidity, financial stability, and API strength, we added Bitfinex connection to Executium, as we believed that the benefits provided by this exchange (and also trading opportunities) far outweighed the risks or that perceived risks are being overestimated by the public.
We also believe that this exchange has provided and there is a good chance that it can provide traders with good opportunities to use this exchange to exploit market dislocations in the cryptocurrencies, as per our trade example above.