Bitfinex and CEX.IO Bitcoin price premiums wave a red flag
The cryptocurrency markets are clearly feeling the impact of current affairs.
If the new Bitfinex and Tether revelations are explosive, the explosion in question most resembles slow motion cinema pyrotechnics. It's a popcorn-worthy experience, foreshadowed by a lot of plot points, and unfolding slowly enough to make sure viewers have a lot to look at.
For example, we can look at cryptocurrency price differences across exchanges following the big reveal and immediately see that something has changed.
The above chart shows cryptocurrency prices on different exchanges. The dark green is Bitfinex, the light blue is CEX.IO and the dark blue is Coinbase. The thick lines at the top are Bitcoin and the thin lines at the bottom are Ether, just to show that the same trend is occurring across more than one cryptocurrency.
As you can see, the prices were all tracking fairly closely across all three exchanges until the incident, after which they started diverging quite dramatically. At the time of writing Bitcoin is trading at a premium of (relative to Coinbase) more than 6% on Bitfinex, about 2.5% on CEX.IO.
Opinion: What it all means
The clincher is that CEX.IO uses the same payment provider as Bitfinex. Both use(d) the now-notorious Crypto Capital, as did QuadrigaCX and several other now-defunct exchanges. And now CEX.IO and Bitfinex alike are experiencing significant premiums.
Cryptocurrency prices will often rise on an exchange when that exchange is perceived to, or is actually, having trouble processing customer fiat withdrawals. People can't get out with fiat, so they convert to cryptocurrency before making a withdrawal. This pushes prices upwards. You also get a similar effect when everyone rushes to the door at once, because they buy up all the cryptocurrency they can with the fiat in their account, and then make a cryptocurrency withdrawal rather than waiting for the slower fiat payment.
But it's been a few days since the big event now, so it's looking like the premium prices could be the result of people actually having ongoing difficulty with their fiat withdrawals at Crypto Capital's partner exchanges.
This suggests that it's not just business as usual at Crypto Capital or Bitfinex right now, and that there's still some struggling behind the scenes.
On a side note
That big dive in the middle of the chart is when the news broke and everyone started dumping all at once. And it's kind of funny when you think about it.
It's intuitive that this would happen, given that fraud allegations against one of the industry's largest exchanges isn't great for overall sentiment, but beyond that it's likely that a large part of the dump was tied to the idea that Bitcoin prices are being artificially propped up by Bitfinex and Tether, and that without Tether's money machine it could all come crumbling down. Indeed, the investigation behind all of this features a Bitfinex executive stressing that Bitcoin prices could plummet to $1,000 if Bitfinex can't access more money.
As damning as it is, the kicker is that the theory of Tether manipulating Bitcoin prices hinges largely on the idea that Tether is printing unbacked money and pushing it onto the ecosystem, rather than only issuing new Tethers at the request of customers. But this incident shows that Tether probably does actually have the money to support its circulating supply, and so perhaps wasn't manipulating Bitcoin prices in the way many believe.
The upshot is that Bitfinex and Tether may not be quite as pivotal a market force as they're believed to be. If Tether only prints money in response to genuine customer demand, then those customers can start turning to different stablecoins.
The same news that gives everyone reason to worry about Bitfinex and Tether more than ever also gives reasons not to worry quite so much. It's not every day that someone is vindicated by fraud allegations against them.
Disclosure: The author holds BTC at the time of writing.