What a crazy week it has been for iFinex and the companies it holds, Bitfinex and Tether Limited. Last week, for those who missed the memo, New York Attorney General’s (NYAG) office revealed that the issuer of USDT and the Bitcoin exchange may be in precarious financial standing.
In an extensive report, the office revealed that Bitfinex is currently owed hundreds of millions from Crypto Capital, a Panama-based payments processor, and has opted to open a $700 million line of credit with Tether’s cash reserves to satisfy its needs. This, along with a recent filing from iFinex itself, confirmed long-held beliefs that USDT, the most popular stablecoin in the cryptocurrency market, was not fully backed by fiat.
Tether Confirmed To Not Fully Back USDT
When investors buy stablecoins, digital assets pegged to and backed by an asset outside of this ecosystem, they expect that the coin is fully collateralized. Per a statement from iFinex, however, obtained by Bloomberg, the USDT crypto asset, which sports a market capitalization of a cool $2.8 billion, isn’t even entirely backed.
The discourse, which purportedly came as a result of inquiries from the Supreme Court of the State of New York, revealed that USDT is backed by cash and “short-term securities” (shares in iFinex) valued at “approximately” 74% of the $2.8 billion market capitalization. (This may be a false equivalence, but USDT is more backed the modern fractional reserve system.)
Bitfinex may be looking to amend the situation, however. According to Dovey Wan, a founding partner of Primitive Ventures, the exchange is planning to raise $1 billion through the sale of Bitfinex-branded tokens and an on-platform initial coin offering, more commonly referred to as an IEO.
What’s notable is that this $1 billion will be raised primarily in USDT, not Bitcoin. This may sound crazy, but Wan was the first on English-speaking Crypto Twitter to report on the news of the Bithumb hack last month and that Bitmain laid off over half its staffers and lost its then-chief executive, Jihan Wu. If Bitfinex successfully completed this raise, it is likely that much of the USDT will either be redeemed/sold off to balance out Tether’s books.
BREAKING and WTF 🤯🤯🤯🤯
Bitfinex is planning on a exchange token sale + IEO… plan to raise $1B in $USDT….
This is really a WTF situation 🤦🏻♀️🤦🏻♀️
— Dovey 以德服人 Wan 🗝 🦖 (@DoveyWan) April 29, 2019
The Odd Silver Lining
The odd silver lining in this whole debacle is that Bitcoin, save for last Thursday’s 10% flash sell-off, has rallied despite this convoluted string of news and developments. As of the time of writing this, BTC is currently up 1.6% in the past 24 hours, trading at $5,276 after a number of days of ranging between $5,150 and $5,225.
While this hasn’t been empirically confirmed, some suspect that the recent confirmation that USDT isn’t entirely backed has led users to buy Bitcoin with their holdings in the stablecoin, resulting in today’s rally. This would make sense. When fears around Tether swelled in mid-October of 2018, specifically as a result of news around the company’s banking partners, BTC rallied from $6,300 to $6,800 in a few hours.
Of course, a rally on this scale has yet to be seen, but Bitcoin heading higher in the face of such news has been classified as “bullish” by analysts across the board. But interestingly, today’s uptick might not be the end of the upward price action.
Since the NYAG released its report, the number of Bitcoin short contracts open on Bitfinex has rallied from 25,000 to 29,894 — an increase of 20% in under a week’s time — as investors expect for this debacle to further implode, thus depressing the value of BTC.
Alistair Milne, the chief investment officer of the Atlanta Digital Currency Fund, however, claims that signs are pointing towards a squeeze of the shorts aforementioned. In a recent Twitter thread, the investor opined that with Bitfinex users liquidating their Bitcoin and withdrawing funds en-masse, coupled with the margin funding rates on the platform skyrocketing to 0.09% a day, there is a “high risk of a very significant short squeeze, especially if BTC withdrawals continue.” Milne did not divulge where BTC could head as a result of the potential squeeze.