Of FUD & Fake News

Singapore, SINGAPORE – Contrary to popular belief, fake news (as well as the coining of the term “fake news”) was not as a result of the 2016 U.S. Presidential Elections, nor did President Donald Trump coin the term “fake news.” But I digress. Suffice to say that fake news and disinformation has existed since the first cave paintings (do you really think one hairy man with a spear could have possibly hunted down so many woolly mammoths alone?). Given our inherently flawed human nature, the inclination to embellish, fabricate and lie are built into our DNA. So when cryptocurrencies first came onto the scene, fake news was already very much part of the human experience. But the cryptosphere coined a new terminology for it “FUD” or fear, uncertainty and doubt (acronyms always sound slightly sexier), to describe anyone making disparaging comments or remarks about an ICO (initial coin offering) or a particular cryptocurrency. Many comments were misleading, some were bold-faced lies. The majority stood somewhere between the two.

To assume that any news piece is devoid of bias is to assume that humans are robots operating under a unified operating consciousness ala The Matrix. It’s not only impossible, it’s impracticable as well. The consumer of Fox News is going to assume that anything coming out of Jake Tapper’s mouth on CNN is liberal diatribe.

But when it comes to crypto, unlike the world of talking heads, there is a strong, invested community interested in uncovering the truth. Unlike cable news networks, the blockchain is transparent and searchable. Statements such as claims as to Bitfinex’s solvency can and is regularly inspected on the public blockchain.

So it was with some surprise that mainstream financial news outlets such as Bloomberg have lent such cache to a rumor that has been going on for awhile now — that Tether is not backed by the dollars that it claims to be backed by. To put things in perspective, this rumor is not new. It’s been around for awhile. As soon as Tether first came on the scene, questions arose as to whether or not Tether had the dollars to back up its stablecoin. But the link with Bitfinex and the claims that Bitfinex is insolvent and is manipulating Tether to goose Bitcoin’s price in an attempt to stem its insolvency is on an entirely different level altogether.

Whether or not Bitfinex is insolvent, I’ll leave to accountants and auditors (who mind you also signed off on Enron’s accounts as well as Lehman Brothers). But what I can say with no degree of hesitation is what’s available for anyone to inspect on the blockchain.

Bitfinex is the world’s second largest cryptocurrency exchange by trade volume (according to data from CoinMarketCap). Full disclosure, Compton Hughes is a client of Bitfinex (but if you are a client reading this, please rest assured that we are sufficiently diversified to cater for any externalities as per our risk management requirements). It’s average 24-hour volume is around US$1 billion. By comparison, Tether has a total market cap of around US$2.4 billion. In three days, the trading volume on Bitfinex exceeds the entire market cap of Tether. But more importantly, Bitfinex makes available the public address of its cold wallets. Let’s take a look at the cold wallet for Bitcoin (BTC), one of the many wallets that Bitfinex has for its myriad coins (it has a lot, which is why Compton Hughes trades there for the diversity). At the time of writing 09:00 GMT, Bitfinex had about US$887 million in its cold BTC wallet (one of several). Not accounting for the other cold wallets it has for other cryptocurrencies, as well as the hot wallets it has as well to facilitate fiat-crypto on-ramps and off-ramps and provide liquidity, Bitfinex could easily cover the entire market cap of Tether, though the ensuing fallout may potentially destabilize the value of other cryptocurrencies and make it challenging for Bitfinex to do so — which brings us to the precise reason why there’s so much FUD around Bitfinex and Tether right now.

There are huge economic incentives to FUD Bitfinex and Tether. Bitfinex provides one of the best margin mechanisms for cryptocurrency trading, as well as one of the most evolved. Full disclosure again, Compton Hughes does not utilize leveraged instruments in our cryptocurrency trading. You can trade cryptocurrencies on margin as well as loan the cryptocurrency you need just like in the traditional capital markets where you can trade shares on margin. Other cryptocurrency exchanges are still playing catch up when it comes to the instruments available on Bitfinex and so there’s a huge incentive to undermine Bitfinex’s reputation — for instance by questioning its solvency. Less savvy traders will close their margin accounts or stop funding and make withdrawals. The same thing happens during a run on the bank. If you spread enough rumors that a bank is insolvent and all depositors draw down on their bank accounts, the bank will collapse — which is why the FDIC or Federal Deposit Insurance Corporation was founded after the Great Depression to prevent such an occurrence on bank deposits up to a certain amount (which would cover the vast majority of depositors). But there’s no such thing with cryptocurrencies (at least not yet). By FUD-ing Bitfinex, depositors who draw down on their cryptocurrencies means that there’s less available for loan — which means that the cost of loaning cryptocurrencies goes up, making leverage in general more expensive, which makes it easier for margin traders to get liquidated. It’s a classic death spiral. Bulls take the stairs, while bears go out the window. So (and this is entirely speculative on my part) it’s entirely possible that stop-loss hunters (the kind which existed on Bitmex) are plying their same trade on Bitfinex. And while interestingly, Binance (which is the largest cryptocurrency exchange by trading volume) does not have dedicated FUD channels on Twitter, Bitfinex does — channels which have been FUD-ing Bitfinex for years — yet somehow, despite all the FUD, Bitfinex continues to exist as a going concern. Not to mention, it’s an open secret that other large cryptocurrency exchanges such as Coinbase, Kraken, Poloniex and even Binance have accounts with Bitfinex to arbitrage for price stability.

With so many parties who have a vested interested in FUD-ing Bitfinex, is it no surprise that even Bloomberg have picked up on what has been a long-running and seemingly organized effort to discredit and undermine Bitfinex? Traders who want to push out margin traders can spread disinformation to encourage Bitfinex withdrawals that will drive up leveraging costs, allowing them to scoop in to close trades out against margin traders, other cryptocurrency exchanges wanting to undermine Bitfinex’s dominance (especially in leveraged instruments) have an incentive to work against Bitfinex and finally, upcoming stablecoin issuers looking to link a story between Tether and Bitfinex by concocting an elaborate conspiracy theory would seek to undermine the dominance of Tether. Given the wide range of economic incentives to FUD Bitfinex and Tether, is it no wonder that it’s difficult to suss the wheat from the chaff amidst all the news, fake or otherwise? A quote which best summarizes the notion comes (unfortunately) from Soviet leader Vladimir Lenin (the other famous Vlad),

“A lie told often enough becomes the truth.”

I don’t deal well in conjecture. But the fact that Bitfinex has consistently and constantly put up its public cryptocurrency addresses suggests to me that they have nothing to hide. And if they do and I am indeed wrong, the fault remains purely my own — but I for one am of the belief that while the “truth” may inevitably lie somewhere in between, the blockchain itself is incapable of lying. So even if you don’t have faith in Bitfinex, have faith in the blockchain as a lie detector.

The writer is Patrick Tan, Partner and General Counsel for cryptocurrency quant trading firm Compton Hughes.