Et tu Bitfinex? - Bitfinex Debt Hedge ELI5
The Hack
A week or so ago, Bitfinex suffered a hack in which ~$78 million worth of bitcoins were stolen.
After having announced a 36% repayment loss that would be spread out over all of its customers, they contrived an ingenious plan to drastically reduce their debt burden.
On August 8, Bitfinex issued a coin BFX to their customers, representing 1$ of debt owed to them (minus the 36% assumed loss).
BFX Coin
To clarify what happened next, I must outline two details about this coin:
- It is backed by an promise to redeem it at a rate of $1=1 BFX at an unspecified point in the future.
- Bitfinex's debt redemption promise is limited to the original person to whom the coin was issued
(e.g. Bitfinex is not bound to redeem BFX for debt from someone who bought it from an exchange seller)
Bitfinex : "The token and your rights pursuant thereto may not be assigned except with notice to, and the prior consent of, the Bitfinex Group, on terms to be determined by the Bitfinex Group"
How to wipe out your debt
Yesterday, this coin was made tradeable on Bitfinex's exchange.
Upon market open, it was trading at around $0.80 and is now trading at a whopping $0.32.
To clarify:
- Bitfinex first pledged to repay 64% of total debt ( 1 - 0.36 )
- 70% of that debt's value was wiped off
- Bitfinex can buy back debt, effectively repaying 44.8% of debt (0.7%*0.64) !
They succeeded in discounting 55.5% points of their debt!
Oh, but it gets better.
Since Bitfinex has no obligation to redeem BFX that was not received from direct Bitfinex issue.
A percentage of that 44.8% of debt will not even have to be paid out!
It gets even better.
Bitfinex collected up to 0.2% commission per trade executed, so made money on the hordes of traders dumping their BFX - and continue to make money on the BFX redemption speculators.
For all criticism you can throw at them, you can't say that they're not resourceful!
@thedailysteem This is excellent commentary. I like news that digs deep like this. You got my upvote and I'm following you now too!
Thanks a lot!
Hahaha "Et tu Bitfinex" :)
Bitfinex - this is business and we see that they are doing well. I dont agree with what they did and how they doing but for now it's effective.
I wonder what people do about it because this is serious scam!
I don't like it at all and this is an attempt to compensate for the very bad decision they made to stop using cold storage. It's going to back fire in the long run. I only traded with them until a week or so before the hack, and then finally quoine rolled out their proper margin trading facility, which has a maximum rate of 25x. They also strictly use cold storage to protect funds from hackers. Right now the amount of traders on there is small but as they roll out their updated dashboard, it's a much nicer interface than Bitfinex and they operate the exchange more like a real forex exchange, and I have traded forex quite a bit a few years back and I was able to do ok on it, and I am generally doing better on Quoine than Bitfinex, with the one exception of the price plunge caused by ... BITFINEX! GRRRR!!
Never heard of quoine before, will check it out.