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Author Topic: This Bitfinex Credit Bubble cannot end well  (Read 61726 times)
wachtwoord
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July 09, 2014, 07:15:31 PM
 #141

Its possible to take swap but never pay for it. That's the pb.

Also, since a year ago, we've increased by about 600%. It would be very possible to leverage long on that with a 200% interest rate.
The increase in price would not be a guarantee while the interest costs would be guaranteed. High interest costs like the cost in your example would force a trader to need a large upswing shortly after opening his position or risk gettting a margin call.

nobody is going to hold swaps at these rates for a year. every day those swaps eat away at your margin position, and every day your margin call gets higher.
If prices go up at a gradual, consistent, pace with few to no downtrends then it would make sense, but no asset price acts this way.

This, and more importantly I think, as someone mentioned, exchange risk. Just look at Gox and some of the other exchanges/businesses that have gone belly up or run with customer money. It's still the wild west out here.

It make more sense for exchange to stay honest. Mtgox blows it big time when Mark can sell the entire business for over 200M but choose to defraud customers.

Bitfinex can probably sell for at least 70M if the volume is true.


If karpales showed anything it's that actors in this space don't always act rationally. I mean he was printing money with a business a Chimpanzee could run and he still managed to fuck it up.
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July 10, 2014, 05:25:49 AM
 #142

The amount of "swaps" increased again at Bitfinex. Now, there are 30.5 millions (https://www.bitfinex.com/pages/stats).

Of course, part of this borrowed money hasn't been converted to bitcoins, but only Bitfinex knows the exact numbers (it's a pity, they could disclose the real number; not even the audit gave any number: https://bitcointalk.org/index.php?topic=560457.0).

We can presume most of this fiat was indeed converted to bitcoins. Some might be waiting in the orderbook for a buying opportunity, but not much, because the interest rates are heavy. An exact number would be about 48,700 btcs, but maybe 10% are still in fiat and, perhaps, we have to take about another 10% for litecoin. A reasonable guess could be that the current number of swaps means that about 40,000 btcs were bought with that money.

It's almost impossible to happen, but if these coins were dumped on the orderbook, the price would go to 0.014, since there is only about 10,000 bitcoins bids above 35 USDs.

There are hidden orders, but I doubt it's worthy to insert them at prices lower than 500 USDs. There are no advantages in using them at low prices. We can only speculate about their amount. But the orderbook is so thin that even if they were 10% of the orders, that wouldn't change a thing. Yes, the orderbook has increased, but much less than the swaps.

It's easy to understand why the orderbook is thin. Most people with fiat at Bitfinex prefer to lend it than to sit it on the orderbook waiting for a flash crash. Specially, because there are high probabilities that it will be reversed. All policies have consequences... if Bitfinex protects the lenders, traders act accordingly and become lenders.

Well, with a ratio of 1:2.5, per each 1000 one can borrow 2500. And this position will be automatically liquidated when the loss is about 40%, meaning the taker is about to lose all his original 1000.

If one doesn't use all the allowed margin, of course it will be possible to lose more without being "liquidated". If many borrowers are not heavy leveraged, that can indeed offer more guaranties to support for any drop. But that will also mean that they have plenty of their own bitcoins to dump, if necessary. No one will borrow money if he has his own fiat sitting at the exchange.

It isn't necessary to be faced with a drop of 40% on bitcoin/litecoin to be "liquidated"; many can be already at a loss at current prices, holding long positions on bitcoins from higher prices.

But with so many long traders, a simple fast drop of 10% probably would make some to be liquidated and many to dump their bitcoins and close their positions voluntarily. At current volumes, a dump of 10% of this positions (about 4000 bitcoins) could be enough to take the price down about the same percentage.

Perhaps, the orderbook could endure those dumps: many buyers would insert new bid offers and lenders that just received their fiat back from borrowers could take the opportunity to buy cheaper bitcoins. But it could also lead to a much lower price than, say, Bitstamp, and trigger more dumps, on a domino effect, that we know well from February.

Just remember that under the about 40,000 btcs bought on borrowed money probably are at least more 16000 btcs (1->2.5) owned by the borrowers and supporting their margin, plus many more from bitcoiners that don't borrow.

Most trades done at a price lower than 40% of the original long trade won't give enough to pay to lenders their principal.

Can we really say there is no risk of this to happen? It isn't necessary a real bad news, like a cracking on the chinese exchanges by their Government. We might just need a wild bearish move of about 10% to trigger it.

Yes, they can reverse the dumps. If the dump is limited to Bitfinex, they can solve the problem. But, as a few already wrote, if the dump is general, even if worst at Bitfinex, that might not be possible.

And this isn't a long traders' problem or even of lenders. Bitfinex promised to support any lenders losses, so they can go down with all of its customers. Clearly, they couldn't keep the exchange open after a huge loss if they didn't at least promise to pay back the losses of lenders. The effect on their reputation would be too damaging.

Shouldn't the simple risk of this to happen make Bitfinex take new measures?

It isn't helpful to change the ratio of liquidations, like closing positions when the loss is already at 30%. That could only start crisis more frequently. The problem is: there are huge leveraged positions, very high numbers of bitcoins at the exchange, but a small orderbook. In a crash, potential supply seems to drastically outstrip demand and even potential demand, because many fiat owners are at the exchange to lend and not to trade.

Of course, that could be achieved by decreasing again the margin allowed, to 2 on 1 or even 1.5 on 1, in order to limit the "swaps" volume.

That would also decrease the interest rate (I'm talking against my short term interest, since I'm a lender most of the time), taking away incentive for customers to lend money and compelling them to, in absence of alternatives, to insert bid orders.

The fees policy, favourable to people that bring liquidity to the orderbook, helped. But it isn't enough. Returning to Bitstamp could solve the problem.

Also, Bitfinex have to state clearly on their TOS that they reserve the right to reverse trades when the prices were manifestly determined by a transitory lack of liquidity caused by the automatic liquidation of positions as well as the terms of liquidation of positions. Bitfinex is closing customers positions without any clear statement on the TOS. FAQ isn't enough unless you make a reference to their content as part of the TOS. Since Bitfinex is dealing with millions, expect lawsuits otherwise. You are no longer dealing with anarchist kids...


This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.



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July 10, 2014, 05:32:50 AM
 #143

I must agree that it makes no sense for bitfinex to run under normal circumstances. However, if for whatever reason they lost a lot of money due to a hack, or due to government intervention, then an incentive to scam might be created.

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July 10, 2014, 03:57:01 PM
 #144


Bitfinex can probably sell for at least 70M if the volume is true.

i am not entirely sure they could sell the IP that they dont own

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July 10, 2014, 06:47:43 PM
 #145

This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.

I'm in the exact same position. Longtime customer. Don't love them, but they've been good enough to keep my business. For now. But I've been watching this situation gradually spiral out of control and it really worries me. We can't assume that little/no swaps are being used to margin buy; that would be counter-intuitive. Swaps can't simply grow forever while the order book remains paper thin. That's just a liquidation cascade waiting to happen. I wouldn't mind as much if BFX honored lowball bids that execute, but they don't. I'd like to know the details behind their decision to remove Bitstamp liquidity when they did.

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July 10, 2014, 08:33:51 PM
 #146

I can understand the reasons why they stop sending fiat/money to Bitstamp, even if they should have explained and announced the measure before adopting it.

But if they don't want to send Bitfinex fiat to Bitstamp it seems they have to use it to insert bid orders in Bitfinex's orderbook at median/low price to try to avoid a crash bigger than 40%. Those orders should be clearly identified as a Bitfinex orders for transparency.
No doubt, that can increase Bitfinex risk, but they were incurring in higher risk by sending the same amount to Bitstamp.

From a customers' security point of view, that this money is at Bitstamp or at the bid side of Bitfinex orderbook won't change much (it will matter to sellers' profits/losses, since sellers will have to sell much lower, but that is a trader's problem not a security issue of the exchange and all of its customers).

For all purposes, every time Bitfinex money ran out at Bitstamp, we could no longer sell bitcoins using Bitstamp bid orders. In reality, we were selling our bitcoins to Bitfinex and at much higher prices than if Bitfinex inserted bid orders at about 30% lower than current prices on its own bookorder, so the risk of Bitfinex was much higher.

I wonder where Bitfinex has its more than 1 million of profits they talked about some months ago. In swaps? Just earning 2% a year in a Hong Kong bank, like all our fiat sitting in their bank accounts?
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July 11, 2014, 01:58:04 AM
 #147

I can't believe this thread even exists, Giancarlo shouldn't have even bothered commenting the obvious!
The logic in the original post is SO totally wrong and the OP really needs to do the homework on basic trading tools (for ANY commodity trading platform!!!) before trying to "make waves" with absolutely no basis to the accusations.

Fist of all, the total borrowed (regardless of what it was in the past) is a reflection of current traded volume on Bitfinex and this number grew simply because more traders joined the platform recently. This is just what it is - Bitfinex recently became the most popular exchange for BTC/USD pair.

Secondly, ALL of the borrowed by traders funds you see are fully backed primarily by THEIR OWN funds. There is simply no other technical way to borrow, but to have sufficient amount in trader's own account and the leverage at Bitfinex is a measly 2.5:1 (this is "nothing" in comparison to a 400:1 or more offered by some Forex brokerages).

What "credit bubble"? What are you talking about? Why do you care and what is your grudge?


you can always ask R to edit the data base and give you some money to play the market, but i guess first u need to be a special friend  Grin

I wonder where Bitfinex has its more than 1 million of profits they talked about some months ago. In swaps? Just earning 2% a year in a Hong Kong bank, like all our fiat sitting in their bank accounts?

If what myself talking about is true, they can just artificially create any amount of fiat and loan out and compound the problem when cascading margin call happen.
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July 11, 2014, 03:01:52 AM
 #148

They did that once (as far as I know), on a more or less emergency situation under pressure from an important customer/partner(?).

If they were doing that, they could have earn millions lending money using their own "swap" system with little risk. Why then to accept customers to lend money? Why allow competition that ruins the interest rates? Why the effort to avoid rates higher than 1% a day, if they are lending? And if they made millions that way, why are we still talking to the founders? They surely would be rich enough to hire people.

They denied being lending money using their own system. I'm tempted to believe them, even if I asked the question and admitted that they might be lending now. I see no problem on them lending real Bitfinex money and their own personal profits. Even if I would rather see that money on bid orders on Bitfinex orderbook.

But if they are not lending, they don't have any reason to create fiat, specially for "friends". Buying bitcoins on fake fiat is too risky, it doesn't seem to be their type. It seems Gox ended bad also because of that.
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July 11, 2014, 03:11:47 AM
 #149

They did that once (as far as I know), on a more or less emergency situation under pressure from an important customer/partner(?).

If they were doing that, they could have earn millions lending money using their own "swap" system with little risk. Why then to accept customers to lend money? Why allow competition that ruins the interest rates? Why the effort to avoid rates higher than 1% a day, if they are lending? And if they made millions that way, why are we still talking to the founders? They surely would be rich enough to hire people.

They denied being lending money using their own system. I'm tempted to believe them, even if I asked the question and admitted that they might be lending now. I see no problem on them lending real Bitfinex money and their own personal profits. Even if I would rather see that money on bid orders on Bitfinex orderbook.

But if they are not lending, they don't have any reason to create fiat, specially for "friends". Buying bitcoins on fake fiat is too risky, it doesn't seem to be their type. It seems Gox ended bad also because of that.

Some very good questions you raise here. Only the top management of Bitfinex have all the answers, the rest of us can only speculate.
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July 11, 2014, 03:34:19 AM
 #150

This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.

I'm in the exact same position. Longtime customer. Don't love them, but they've been good enough to keep my business. For now. But I've been watching this situation gradually spiral out of control and it really worries me. We can't assume that little/no swaps are being used to margin buy; that would be counter-intuitive. Swaps can't simply grow forever while the order book remains paper thin. That's just a liquidation cascade waiting to happen. I wouldn't mind as much if BFX honored lowball bids that execute, but they don't. I'd like to know the details behind their decision to remove Bitstamp liquidity when they did.
As long as the average leverage ratio stays steady then there would not be a credit bubble growing. Any successful exchange that offers leverage would be expected to have credit balances grow as more customers deposit funds into the exchange looking to trade. 

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July 11, 2014, 05:23:54 AM
 #151

They did that once (as far as I know), on a more or less emergency situation under pressure from an important customer/partner(?).

If they were doing that, they could have earn millions lending money using their own "swap" system with little risk. Why then to accept customers to lend money? Why allow competition that ruins the interest rates? Why the effort to avoid rates higher than 1% a day, if they are lending? And if they made millions that way, why are we still talking to the founders? They surely would be rich enough to hire people.

They denied being lending money using their own system. I'm tempted to believe them, even if I asked the question and admitted that they might be lending now. I see no problem on them lending real Bitfinex money and their own personal profits. Even if I would rather see that money on bid orders on Bitfinex orderbook.

But if they are not lending, they don't have any reason to create fiat, specially for "friends". Buying bitcoins on fake fiat is too risky, it doesn't seem to be their type. It seems Gox ended bad also because of that.

Some very good questions you raise here. Only the top management of Bitfinex have all the answers, the rest of us can only speculate.


They are mostly rhetoric questions, because (right or wrong) I think I know the answer. They did all of that because they are not lending money (or not big amounts, responsible by the increase of swaps) and, clearly, not creating fake fiat to lend to anyone.

I saw Bitfinex more than once adopting measures that hurt its short-term interest in order to defend its long-term interest or matters of reputation/principle (for instance, a recent one, even if symbolic: http://www.reddit.com/r/BitcoinMarkets/comments/28twpj/manipulating_bfx_swaps_for_fun_and_profit_a_howto/ciehls0 , you have to read the previous post).

A greedy or dishonest exchange wouldn't let customers to lend money and would control the supply of the money to lend it self at high interest rates. They decided that this policy would hurt the long-term interests, even if it could be very profitable on the short-term.

Several times Bitfinex reveled a clear concern with the excessive rates of interest. Again, they were putting the long-term interest ahead of the short-term, since they get more fees if the rates are high.

Dishonest persons don't think long-term, because they have no long-term plans for their business. So, I think they are an honest exchange.

That doesn't mean I like every thing about them, including (but not only) the current volume of swaps. Or that sometimes I don't hear a small voice saying "Fool, you are going to lose all your money on Bitfinex. Fool!".
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July 11, 2014, 05:36:12 AM
 #152

This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.

I'm in the exact same position. Longtime customer. Don't love them, but they've been good enough to keep my business. For now. But I've been watching this situation gradually spiral out of control and it really worries me. We can't assume that little/no swaps are being used to margin buy; that would be counter-intuitive. Swaps can't simply grow forever while the order book remains paper thin. That's just a liquidation cascade waiting to happen. I wouldn't mind as much if BFX honored lowball bids that execute, but they don't. I'd like to know the details behind their decision to remove Bitstamp liquidity when they did.
As long as the average leverage ratio stays steady then there would not be a credit bubble growing. Any successful exchange that offers leverage would be expected to have credit balances grow as more customers deposit funds into the exchange looking to trade. 

I think the main point is the ratio Volume of Swaps vs orderbook. If the first increases steadily at three times (just an example, I didn't do the math) the increase of the volume of the orderbook, that is a reason for concern and for the adoption of measures by Bitfinex to limit its grow.

On an healthy exchange both should increase at similar rates, as the number of customers grow. If most of the customers are bullish, that should have a similar impact on the swap volume and on the bids in the orderbook. This isn't happening.
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July 11, 2014, 05:44:55 AM
 #153

This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.

I'm in the exact same position. Longtime customer. Don't love them, but they've been good enough to keep my business. For now. But I've been watching this situation gradually spiral out of control and it really worries me. We can't assume that little/no swaps are being used to margin buy; that would be counter-intuitive. Swaps can't simply grow forever while the order book remains paper thin. That's just a liquidation cascade waiting to happen. I wouldn't mind as much if BFX honored lowball bids that execute, but they don't. I'd like to know the details behind their decision to remove Bitstamp liquidity when they did.
As long as the average leverage ratio stays steady then there would not be a credit bubble growing. Any successful exchange that offers leverage would be expected to have credit balances grow as more customers deposit funds into the exchange looking to trade. 

I think the main point is the ratio Volume of Swaps vs orderbook. If the first increases steadily at three times (just an example, I didn't do the math) the increase of the volume of the orderbook, that is a reason for concern and for the adoption of measures by Bitfinex to limit its grow.

On an healthy exchange both should increase at similar rates, as the number of customers grow. If most of the customers are bullish, that should have a similar impact on the swap volume and on the bids in the orderbook. This isn't happening.

Exactly -- you can't simply point to "increased growth" because it's simply not reflected by the order book. Clearly, USD swaps taken (at very high interest rates) are growing at a much fast pace than order book liquidity.

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July 11, 2014, 05:53:18 AM
 #154

This is just unbelievable how this subject keeps getting "fueled" by SO much nonsense.
I deeply sympathize Bitfinex team for how much crap, from "some" people, they have to deal with.

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July 11, 2014, 06:30:58 AM
 #155

This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.

I'm in the exact same position. Longtime customer. Don't love them, but they've been good enough to keep my business. For now. But I've been watching this situation gradually spiral out of control and it really worries me. We can't assume that little/no swaps are being used to margin buy; that would be counter-intuitive. Swaps can't simply grow forever while the order book remains paper thin. That's just a liquidation cascade waiting to happen. I wouldn't mind as much if BFX honored lowball bids that execute, but they don't. I'd like to know the details behind their decision to remove Bitstamp liquidity when they did.
As long as the average leverage ratio stays steady then there would not be a credit bubble growing. Any successful exchange that offers leverage would be expected to have credit balances grow as more customers deposit funds into the exchange looking to trade. 

I think the main point is the ratio Volume of Swaps vs orderbook. If the first increases steadily at three times (just an example, I didn't do the math) the increase of the volume of the orderbook, that is a reason for concern and for the adoption of measures by Bitfinex to limit its grow.

On an healthy exchange both should increase at similar rates, as the number of customers grow. If most of the customers are bullish, that should have a similar impact on the swap volume and on the bids in the orderbook. This isn't happening.

Exactly -- you can't simply point to "increased growth" because it's simply not reflected by the order book. Clearly, USD swaps taken (at very high interest rates) are growing at a much fast pace than order book liquidity.

The reason for this situation is the high interest rate:

Most fiat that arrives Bitfinex doesn't go to the orderbook as bids, instead it's lent because of the high interest rate. Also, many think it's no use to insert low bid orders in the orderbook, because in the case of a big flash crash, probably the trades will be reversed.

Borrowers mostly don't insert bids in the orderbook, at least not under 550 usds, since they are expecting the price to go up and are paying high interest rates for the fiat. They just buy the bitcoins as fast as compatible with a reasonable price.

Seems to be this demand pressure that makes the price of bitcoin higher than on Bitstamp or Btc-e. And this divergence in the prices doesn't go higher because this price attracts also more bitcoins to Bitfinex from arbitrageurs and people waiting for a higher price to sell.

In conclusion: there are higher amounts of fiat and bitcoins at Bitfinex, but most of the fiat doesn't go directly to the orderbook, instead is lent. And it's the fiat borrowers that are buying the big chunk of the bitcoins. Therefore, most of the buyers are people that must have the finger on the sell trigger in case of a small crash. But the higher price also attracts potential sellers of bitcoins, that are waiting for the right price, and that will also dump in case of a crash.
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July 11, 2014, 02:37:23 PM
 #156

This is just unbelievable how this subject keeps getting "fueled" by SO much nonsense.
I deeply sympathize Bitfinex team for how much crap, from "some" people, they have to deal with.


Can you point out and refute the "nonsense" raise here?
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July 11, 2014, 02:39:28 PM
 #157



If prices go up at a gradual, consistent, pace with few to no downtrends then it would make sense, but no asset price acts this way.

you really can´t compare BTC to other existing assets.
Maybe BTC will be the first asset to gradually climb to the moon.

In my opinion this is actually quite probable because of the scarcity in BTC and things
like the block reward halving...

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July 12, 2014, 02:47:39 AM
 #158



If prices go up at a gradual, consistent, pace with few to no downtrends then it would make sense, but no asset price acts this way.

you really can´t compare BTC to other existing assets.
Maybe BTC will be the first asset to gradually climb to the moon.

In my opinion this is actually quite probable because of the scarcity in BTC and things
like the block reward halving...
Bitcon already has had several downturns and several market crashes.

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July 12, 2014, 10:31:23 AM
 #159



If prices go up at a gradual, consistent, pace with few to no downtrends then it would make sense, but no asset price acts this way.

you really can´t compare BTC to other existing assets.
Maybe BTC will be the first asset to gradually climb to the moon.

In my opinion this is actually quite probable because of the scarcity in BTC and things
like the block reward halving...
Bitcon already has had several downturns and several market crashes.

you can´t compare the current Bitcoin with Bitcoin when it started  Grin

Today there are millions of venture capital coming into the BTC world, many exchanges etc.
Everything has matured and the big volatility with several market crashes won´t return in my opinion.

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July 12, 2014, 01:45:00 PM
 #160

you can´t compare the current Bitcoin with Bitcoin when it started  Grin

Today there are millions of venture capital coming into the BTC world, many exchanges etc.
Everything has matured and the big volatility with several market crashes won´t return in my opinion.

The issue is not bitcoin price crashes.

Several posters have pointed out the order book on Bitfinex is quite thin compare to the number of active swap they have.
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