It’s Back to Normal for Crypto-Markets with Chaos and Confusion

By | October 15, 2018

The price of Bitcoin in Asian markets briefly spiked up to $7800 USD before settling down to $6750 Monday morning.

That is still $350 higher than Bitcoin prices in North America. The markets have not seen such price disparity since the fourth quarter of 2017.

Such disparity is either very good news or very bad news.

First, let’s deal with the worst-case scenario.

The price spike up to $7800 occurred on the Bitfinex exchange late Sunday evening or early Monday morning, depending on whether you live in Asia or North America.

The bitcoin price bump occurred because of a dump in the Tether, the USD-backed stablecoin that is backed by the Bitfinex group.

Tether hit a low of 92 cents before recovering to 97 cents at time of writing.

There are rumours that Bitfinex is seeking a new banking partner that will hold the US dollars that are necessary to back Tether.

Indeed, Bitfinex has announced on Twitter that for “certain groups” deposits of fiat money (US dollars, Euros, Yen) has been suspended.

Bitcoin price disparity between exchanges can make “old hands” VERY nervous.

Before Mt. Gox imploded in 2014 (the largest cryptocurrency exchange failure in history) the price of Bitcoin was 25% higher than anywhere else.

What was happening was that Mt. Gox. had delayed withdrawals but still allowed deposits, thereby inflating the price of bitcoin on the exchange.

You could buy bitcoin but couldn’t sell it, so the price of bitcoin on that exchange was higher than anywhere else.

Therefore, when the price of bitcoin went up drastically on Bitfinex in comparison to other exchanges, many traders feared the worst.

But Now the Good News

A key difference between the Bitfinex of today and Mt. Gox of 2014 is that while you could put money into Mt. Gox and not get it out, the reverse is true right now for Bitfinex.

You can’t deposit fiat money in Bitfinex, but you can move money out.

Despite the complaints of some Twitter users that their accounts have been frozen and they can’t move their bitcoin/fiat/whatever funds out of Bitfinex, withdrawals are possible.

I know this to be true as Monday morning I moved about $10K of Ethereum out of my Bitfinex account. The funds were safely deposited to my wallet in about 20 minutes.

So much for that rumour.

But that stills begs the question as to why the price of Bitcoin is higher on Bitfinex (and other Asian crypto-exchanges that use Tether) than in exchanges in North America that don’t use Tether.

There is an explanation: For most of 2018, Tether has the been the stablecoin of choice for arbitrage between exchanges.

For example, under normal circumstances, when the price of bitcoin is higher on Bitfinex (Asia) then on Kraken (US), traders sell bitcoin on Bitfinex for Tether, transfer Tether to Kraken and buy cheap bitcoin, and then transfer the cheap bitcoin to Bitfinex for selling.

Wash, rinse, repeat until the price difference has been arbitraged away.

But traders can’t do that right now as the Tether network is in practice shut down and most if not all exchanges have stopped Tether withdrawals for the time being.

The informal arbitrage system between crypto-exchanges using Tether has broken down.

What to Do?

I’m not giving investment advice to anybody but it looks to me that the price differential between Asia and North America (or to be more accurate, between exchanges that list Tether and the other exchanges)  is shrinking as panic starts to subside.

Therefore, I am shorting bitcoin on Bitfinex and hedging my short by buying bitcoin future contracts on Bitmex.

It looks to me like this is one of those easy trades where I make a few dollars in a couple of days or a week at most.

It doesn’t matter if the price of bitcoin goes up or down, I just need the price difference between Bitmex and Bitfinex to shrink to nothing and I’m in the money.