What are the just issued Bitfinex Tokens (BFX) worth? 3%: Overview, Roses & Thorns, Quick Analysis

in bitcoin •  3 years ago  (edited)

A quick look at BFX, the token that Bitfinex is issuing to make its customers whole.

Bitfinex's BitGo wallet system was hacked on August 2nd and 119,756 BTC were stolen from Bitfinex. In response, Bitfinex has had all of its customers take a ratable haircut and given them all a new asset, BFX, to compensate them for that haircut. Here are the details of what the BFX asset is:

To demonstrate [Bitfinex's] commitment [to make you whole to the extent of the full amount of your pro rata portion of the Losses], the Bitfinex Group is crediting to your account a token evidencing a limited-recourse, contingent obligation of the Bitfinex Group. The token is a notional credit, is dependent on the Bitfinex Group’s recovery of Losses, and is subordinated to any claims against the Bitfinex Group not related to the Losses. Recovery may include any of the following: recovery of stolen property; funds raised in one or more financings; and available cash from ongoing operations. The token has been issued to you without reduction of or other release or waiver of any claims you may have against the Bitfinex Group. Similarly, the Bitfinex Group has not waived any claims or defences it may have under the Terms of Use or otherwise should you choose to assert any claims independent of the token. The obligation evidenced by the token bears no interest and is not entitled to dividends, distributions, or other income amounts of any kind. The token is intended to be redeemed to the extent of its ratable share of the recoveries and may in any event at any time be redeemed by the Bitfinex Group at the Bitfinex Group’s sole option for its face value less the amount of any prior redemptions.

Translating that for you, these tokens are IOUs in the event that Bitfinex effects a recovery of assets stolen from Bitfinex during the hack, they will distribute them to the BFX holders. They are debt backed tokens. Sounds great. Let's look at BFX's Roses and Thorns.

BFX Roses

  • BFX may be worth par (100% their nominal dollar value, a debt term) if Bitfinex and international law enforcement agencies can track a $65mm Bitcoin thief. History suggests this is unlikely.
  • These tokens create a way for Bitfinex or potential acquirers to cheaply assume this debt and retire it. This type of outcome is likely better for Bitfinex's customers than a bankruptcy.

BFX Thorns

  • BFX has no cashflows, no dividends, and no profit sharing from Bitfinex.
  • BFX aren't consumed or used in any process.
  • They have no legal security. The language is very wishy washy. Lenders, which is what BFX token holders are now, have no liens or collateral, have only loosely worded promises. This is crucial and unfortunate and materially reduces BFX value.
  • BFX suffers from Bitfinex counterparty risk. If Bitfinex goes under, these coins will be worthless, even if the law enforcement recovers all the stolen BTC in the future.
  • US investors cannot buy them. This will make the BFX market substantially less efficient.
  • Bitfinex has rushed this.
  • Bitfinex has not given anyone a clear look into the accounts, so no on can be sure the haircut was accurate or fair.
  • It's unclear how many BFX exist.
  • BFX do not exist on any blockchain yet, just in some Bitfinex internal record system.
  • BFX's existence and legal standing is so shaky that the token could be unwound or found to be completely illegal. A customer's CLAIM may supercede these tokens. IANAL.

A Simple Formula for What a BFX Token is Worth

P (Probability) the Bitfinex hackers are caught and the BTC recovered AND Bitfinex still remains in business AND Bitfinex honors its loosely worded promises

My guesses

  • P Hackers are caught and the BTC recovered in 3yrs = 5% | Evidence: Mt. Gox, DAO hack, general failure to catch crypto hackers, still unaware that Bitfinex is aware how they were hacked
  • P Bitfinex remains in business conditional on the above in 3yrs = 70% | Evidence: Exchanges do stop, hacked exchange more so, works out to 10% chance of failure each year, that might be generous.
  • P Bitfinex honors its loosely worded promises = 95% | Evidence: bad business not to, but if they are in extremis, who knows, and other creditors may come first.

My BFX price formula with the above inputs works out to 3.3% of par value (3.3 cents on the dollar). As I was writing this, BFX opened for trading and immediately went from 100% to 20% and back up to 40%. Stay safe out there. As always, I would love to hear people's thoughts or own efforts at valuing BFX below. Bitfinex released this so quickly that this is a fast-moving situation. I'll update this piece through the day as my information gets better.

Random Notes

  • Bitfinex's CEO wrote: ""With our BitGo wallet solution it becomes impossible for our users to lose their bitcoins due to us being hacked or stealing them."" Just a reminder to never get cocky in crypto or be 100% certain of anything.
  • Bitfinex still don't know how the hack happened.
  • Bitcoin developer Peter Todd publicly tweeted in the last 2 weeks that 2 different Bitcoin exchanges (Exchange 1 and [Exchange 2])(https://twitter.com/petertoddbtc/status/758847731548893188)) were insolvent and that the customers should remove their money from them. Neither of those exchanges was Bitfinex.
  • As a redditor terpnation13 pointed out:"Just want to toss this in...if (big if) BFX actually ends up at or around $1, it will have the 7th or 8th largest market cap in crypto."

Disclosure: I am not a Bitfinex customer. I do not own any BFX. I do own BTC.

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Great piece, @eeks. Any chance you're willing to share your formula?

P (Probability) the Bitfinex hackers are caught and the BTC recovered AND Bitfinex still remains in business AND Bitfinex honors its loosely worded promises

So 0.05 * 0.7 * 0.95 = 3.3%.

Thank you!

If more people applied bayes theorem to make decisions, the world would be a better place.

If more people would (or could) think probabistically, the world would be a better place.

I work in a field that would benefit. But most people stick to their gut and what feels good. Honestly, most people don't even read up on process (team building, diversity, probability techniques) and how to improve or what mistakes to easily avoid (cognitive biases, groupthink). Which stinks in general but is awesome for people who don't think that way. Always advantaged in the actual work, if not in the narrative and politics of the work.

What's so unlikely in this world?
Everything is possible if there is.

"Bitfinex still don't know how the hack happened." that is not assured for your existed and new customers.

Need to withdraw everything from there for sure.

I would add in a possibility of the hacker returning the money, a 5% reward has been stated but they could probably get 10%, add to that the trading they could do on bitmex on the bfx tokens. Not too likely but a possibility.

I agree with the rest of the points and had being thinking a lot of them but as I had x amount bfx I didn't want to believe them, when price went back to $0.40 I figured it was time to get out, if I was being more rational I would've bailed at $0.20.

I posted this on the other article, but figured I'd share my opinion here as well.

Many assumptions are in your math above. First let me discuss the money owed to customers. Roughly 70 million tokens were issued with $1 being par with each token. Many of those shares will be given the chance to become actual shareholders in Bitfinex. I know of some folks who are eager to own the largest $ exchange of BTC.
This will greatly decrease BFX's outstanding liability on a debt basis. I also know of interested parties who MIGHT give BFX a cash infusion for an equity stake. This is the time for them! You buy when there is blood in them there streets and it's mighty bloody out there.
I personally believe the above and a couple options not mentioned will greatly reduce the debt BFX owes it's customers. Traders are likely to not only return in strength, but new customers as well. Your sample day of volume is about to rise significantly. I traded professionally for many years and I'm a contrarian by nature. Disclosure: I have a large position in BFX tokens and it's going to get larger. Bitfinex can actually come out of this situation stronger than ever!