What's Happening With Bitfinex

What's Happening With Bitfinex

This afternoon I was cruising for something to write about and I noticed the Bitfinex kerfluffle.

First, a little context and history. Bitfinex, an unregulated exchange based in Taiwan, handles about 10% of all Bitcoin transactions. They lost 120,000 Bitcoin in the fall of 2016, worth $72 million at the time, and issued a cryptocurrency called BFX Tokens to cover the loss. The tokens are now entirely redeemed and reported as idle per Coin Market Cap:BFX.

Wells Fargo suspended wire transfers for Bitfinex last April, resulting in a lawsuit that was dismissed after just a week. Taiwanese banks cut them off shortly thereafter, and now it is unclear where they hold their fiat currency. A month ago $30 million worth of Tether was stolen, which matters for Bitfinex as the exchange and this token are understood to be closely connected, thanks to a record found in the Paradise Papers.

Per the @bitfinex Twitter account, they were under a denial of service attack, but their system monitor shows that the attack ended shortly after their announcement. It's curious that they did not update this to reflect an end to the problem.

And now the big picture …

The New York Times is comparing the situation with Bitfinex to a slow motion Mt. Gox, a reference to the $500 million hacking loss in 2014 that crashed the Bitcoin market.

This part is particularly worrying

“One persistent online critic, going by the screen name @Bitfinexed, has written several very detailed essays on Medium arguing that Bitfinex appears to be creating Tether coins out of thin air and then using them to buy Bitcoin and push the price up.”

No matter what, the quarter trillion dollar Bitcoin market cap is about to get a reality check, because futures trading on the currency started on the Chicago Board Options Exchange Sunday night, about the time I began drafting this post. If Bitfinex really is running up the price using Tether, the traders will figure it out and punish everyone holding the inflated coins.

The launch of futures trading is widely seen as an event that's going to take some of the heat out of the market, but that will happen in banker time, not internet time. This next month could see wild gyrations.

What does that mean for those who are either building transaction oriented businesses or who are holding Bitcoin obtained via an ICO?

Those who maintain a mix of Bitcoin and fiat for their daily business are likely to limit their exposure to volatility by sticking to the state backed currency, rapidly getting in and out of Bitcoin as needed.

Decision making by ICO operators is less clear since its basically the Wild West. Mature operators were presumably excited by the run up, but not so much that they didn't take enough money off the table to support their plans. Latecomers may get an unpleasant surprise, but given how over-subscribed most ICOs have been, it seems unlikely any of them will be left without enough funds to execute.

Things that go up eventually come down, especially if they've been taken up by connivance rather than innovation and hard work. But there is plenty of the latter in the cryptocurrency universe and those doing actual work will welcome the further legitimization that exposure to the futures market brings.