Could Mt Gox Repeat Be Real, or Why Bitcoin is Trading at Hefty Premium on Bitfinex

27.04.2017

The past week or so has been quite remarkable considering significant price differences at various bitcoin exchanges. It is most noticeable in case of Bitfinex, where Bitcoin is still trading at significant premium. At times, the spread reached $110.

It all started when Bitfinex halted fiat transactions. Shortly afterwards, some community members started expressing their concerns as to the possibility of yet another monumental failure of a major online exchange like the notorious collapse of Mt.Gox.

The Mt.Gox Effect: Is the Concern Justified?

Indeed, Mt.Gox’s collapse was preceded by a withdrawal halting and large price differences across various platforms. It started in August 2013 when Bitcoin was on a bull run ultimately reaching ATH. That’s when the first warnings of Mt.Gox’s unsoundness began popping up. Quite possible, that’s when people started believing such price discrepancies were a ‘bad omen’.

Still, aside from Bitfinex, some other exchanges including BTC-e and OKCoin also have problems with fiat deposits and withdraws. Their troubles are considered among the factors that helped bitcoin price grow in April. At the same time, cryptocurrency is way cheaper at OKCoin than elsewhere.

With all that being said, the main difference between 2013 and today’s events is the MtGox’s use of the notorious trading bot Willy. It was first noticed in September 2013 and remained active until January 2014. A month before, bitcoin price has first reached its historic maximum, and the credit for MtGox’s higher price often goes to Willy.

For comparison, below are the prices offered by some exchanges in December 2013:

$1,242 – Mt Gox
$1,175 – Bitfinex
$1,163 – Bitstamp

Aside from Willy, Mt Gox was also a home for another bot named Markus. Anyway, it was Willy who was actively driving up the bitcoin premium on Mt Gox on a regular basis. According to “The Willy Report”, the account remained operational until January 2014 buying around 100 BTC each hour with intervals of 5 to 10 minutes.

Back to today’s Bitfinex, there is actually no substantial evidence to justify any comparison with Mt Gox. The exchange furiously denies assumptions of possible non-solvency, and has even issued a statement in this regard.

Latest update on money flow: https://t.co/gVvI034P5z

— Bitfinex (@bitfinex) April 20, 2017

The Tether Factor

Speaking of price discrepancies, Poloniex should not go unmentioned either, with Bitcoin price levels comparable to that at Bitfinex. However, one should remember that Poloniex doesn’t use real fiat currencies, and USDT is none other than Tether, a digital asset whose price remains stable against USD at 1:1. Or, to be precise, it remained so until recently: Tether price went down when Bitfinex and other exchanges faced fiat problems: currently it stands at around $0.90.

Source: coingecko.com

At the first glance, it looks like a great opportunity for arbitration, however, users have already started doubting Tether Limited’s business model, as well as the company’s ability to keep their asset’s price pegged to USD.

“The problem here is that this is creating a very large price spread between exchanges that quote ACTUAL dollars and those that quote tether. This distinction is not being made clear, which I think is having an unhealthy influence on price rallies in cryptocurrencies. Furthermore, I have doubts that this tether is backed by dollars at all and in all likelihood is a fractional reserve,” Reddit user CryptoTraderPro wrote.

Other users also express their concerns about the project referencing some of Tether’s Terms of Service, something ForkLog noted as early as March this year:

The terms actually read:

“Tethers are not money and are not monetary instruments. They are also not stored value or currency. There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.”

What Is Happening to Tether

The halt of fiat operations at BitFinex was caused by limitations imposed by Wells Fargo. At some point the exchange even sued Wells Fargo, however, later it withdrew the lawsuit. A similar lawsuit was filed by Tether Limited.

The company has described the course of events in its recent statement:

“Since April 18, 2017, all incoming international wires to Tether have been blocked and refused by our Taiwanese banks. As such, we do not expect the supply of tethers to increase substantially until these constraints have been lifted.”

The statement goes on to say that the corporation is seeking alternate banking corridors that could enable depositing and withdrawals once again. New USDT tokens are not being issued, and Tether continues to maintain a 1:1 backing of real-life fiat.

The question remains though why is the 1:1 peg not working? The most obvious explanation is the lack of liquidity due to banking limitations, as well as some panic fueled by recent news and rumors.

Users being in a hurry to get their USD deposits could be willing to sell their USDT at a loss instead of waiting for an unspecified period of time until the bank issues are settled. Another factor is the crypto community itself that has obviously learned the Mt.Gox lesson, and seems to be always ready to offload their assets before they turn into useless numbers.

Still, it’s not quite clear whether the problems Tether is experiencing at the moment are related solely to banks, or there are some other aspects not revealed to the general public. Still, if fiat withdrawals are restored, the USDT exchange rate is likely to get back to its normal 1:1 ratio.

For now, this hasn’t happened, and the first cryptocurrency’s price keeps on climbing up. On Wednesday, April 26th, Bitcoin exchange rate at Bitfinex has reached the $1,411 ATH, while at Bitstamp it stood at $1,330. The price discrepancy thus remains great, and the situation remains far from healthy.