Bitfinex

While market is celebrating the ETH's London hardfork and watching the burn numbers (i.e. how much ETH was destroyed thus supply decreased since fork) and usual mania I am going to try to write some thoughts on Bitfinex and the players on it.

Who

iFinex Inc founded in Hong Kong operates Bitfinex (the exchange) and Tether (the stable coin also known as USDT).

Preamble - from personal experience

Recall BTC in 2010/2011 was worth peanuts. Suddenly, those players who started out as market makers or investors had accumulated vast wealth over space of handful of years (e.g. some public faces like Max Boonen of B2C2; Roger Ver etc). Comes a day you start to wonder about counterparty risk (e.g. hacks of exchanges; kidnappings of exchange CEOs; regulatory pressures etc). X-border transactions via tradFi routes are too slow - especially when you have a juicy arb opportunity (Sam Bankman-Fried spoke of it during one of the oddlots podcast). Enter the concept of an IOU pegged to $. Indeed fiat on-ramp must go via a traditional or neo-bank so need to find firms that are open to new ideas.

Scary monsters aka unknowns

Who are the big USDT users? Why is it so big in Asia? How can the exchange survive after the hacks it has faced?

Recall

Asia was & is a hotbed of semi-conductor + general manufacturers. Mining was concentrated in cheap energy areas - again we know China had a huge market share. Speculation in Asian markets was pretty high leading into 2008 GFC and it didn't just suddenly disappear overnight due to the GFC.

Scary monsters reboot

Crypto (BTC namely at the beginning) provided a huge opportunity for various industries. Some of the biggest crypto exchanges were in Asia - Okex (biggest by Q1 2015), Huboi, Bitmex (became biggest around Q2 2017 but indeed since March 2020 lost its allure), Bitfinex.

musings:

Coinbase was not on par and has always lagged these however coinbase never got suspected of wash trading which post 2017 became a hot topic for Asian exchanges; namely Okex

Early adopters had vast sums of crypto assets that they didn't wish to sell but leverage to gain more. Market makers, speculators and investors from Asia actively participated and sought out opportunities. Gamification of crypto trading could be seen in the leaderboard (aka ranking) pages that some of these exchanges provided. Herein, you can see details on top positions; or how much PL has been made by those who wish to publicise it etc. Bitmex (another scary monster) after number of iterations came out with a perpetual swap product that never expired. TradFi was still not keen to provide fiat on-ramps too easily.

Context of size of positions

Tradition dictates you watch the #1 on Okex leaderboard and eat popcorn - because these were largely huge speculative naked positions/bets that when liquidated would move markets; e.g. July/Aug 2018 $480m long position liquidated which got worse as time ticked by due to not being able to cover it instantly and BTC price continuing downwards. At the end the exchange injected BTC from its private funds + socialised the loss out of everyone through clawback of partial profits (of those who were on short side).

musings:

Some of those who got to #1 tried to employee some tricks such as opening a naked opposite position on another exchange. However, again this requires you are already a huge player in the game.

Fast forward to today

iFinex saw an opportunity for liquidity providers thus ensured its USD exists on a number of blockchains (ETH, BTC and Tron - tron largely because its super fast). Moreover, iFinex ensured to vastly improve its infrastructure for Bitfinex; to the extent that its rare to see it go down compared to Coinbase, FTX, Binance amongst others, during volatile markets. iFinex invested in building out tooling that folks could use - not just for gamification but also leveraging automation / AI / ML.
Additionally, biggest market makers, VCs or HFs like 3AC saw the stability and silent innovation of the platform and therefore actively traded via it and use it for its liquidity and orderbook depth.

musings:

The API that exchange makes available has been detailed for years and the wash trading noise of Huboi / Okex etc has never been seen on it.

Lately, some of the biggest players that existed on Huboi / Okex etc jumped ship to Bitfinex during the China miner exit.

That is the reason I take note when BTC or ETH long/short start to tickle my nose especially when the funding rate of these crypto assets start to spike. Bitfinex has been a tortoise that has slowly been churning away and building itself up. Lastly, there are some murmurs that Bitfinex is thinking about moving to Switzerland; which would make perfect sense given how advanced and crypto friendly FINMA have been over past years. Potentially, this could provide iFinex a way to move USDT to Switzerland thus into a banking relationship + jurisdiction that everyone feels more confident in.

musings:

I have been following the infrastructure bill sage in the US. The bill proposed has a very loose definition of "broker" which captures nearly every participant and will force them to observe users in order to comply with tax reporting obligations. An amendment by Wyden-Lummis-Toomey tries to clean up this "broker" definition (e.g. developers should not be regarded as brokers). However, late last night there was a "push" apparently by Treasury to get Portman-Warner amendment backed. The P-W amendment is not as clean as W-L-T. If W-L-T fails to win enough votes then there is a decent chance of noise, especially in the ETH market. Irrespective, the rules will go into effct in 2023 (so there is ample time for further revisions) but market way wish to decide US is no more crypto friendly.