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Daniel Cawrey is President and Chief Executive Officer of Pactum Capital, a quantitative investment firm in the field of cryptocurrency and hedge funds. Sina Nader was a professional fund manager at Morgan Stanley as well as at Credit Suisse and is now responsible for investor relations at Pactum.
The opinions expressed are those of the authors and do not constitute investment advice.
"The story is not repeated but often rhymes"
This quote is often attributed to Mark Twain. And while Bitfinex does not exactly rhyme with Mt. Gox, there are several parallels in the stories of these two exchanges. Those interested in understanding Bitfinex are well served to understand what happened to Mt. Gox.
The New York Attorney General (NYAG) investigated Bitfinex and Tether. Here is a summary for those who do not know the story. Bitfinex is a cryptocurrency exchange, whose owners also control Tether, the issuer of the most popular stablecoin, known as tether or USDT. NYAG accuses Bitfinex of losing more than $ 800 million. He claims that the stock market tried to recover these losses by drawing on the cash reserves of longe, the stable company that its constituents also control.
The problem is that taking money from Tether would make stable information more or less useless. Indeed, Tether is supposed to have cash reserves and some people still believe in it. Yet, if there are no cash reserves, or less money than expected, the very concept of Tether is essentially fraudulent.
This is on display in last weekend's repository. At the end of the document, the NYAG issues an ultimatum. The office "seeks to prohibit respondents from taking any other action to access, lend, credit, encumber, pledge, or make any other transfer or similar claim between Bitfinex and Tether".
Where is the money?
The cliff for BTC on Coinbase on April 25 after the abandonment of the Bitfinex / Tether lawsuit. Source:Tradingview
One wonders: How exactly did Bitfinex manage to lose more than $ 800 million? The answer is closely related to the stock market's banking relationships or their absence. Crypto "OG" and insiders may feel like watching this movie before.
Indeed, these feelings would be quite valid. In the early days of crypto, one of the largest bitcoin exchanges, known as Mt. Gox, also had major problems mainly because of its banking relationships. It's so bad that in February 2014, Mount. Gox ceased all transactions and filed for bankruptcy protection. At the time, he claimed to have lost 624,408 BTC.
Here is what the assets look like in exchange for unbanked and non-compliant cryptocurrency. Source: Wizsec
A Japanese bank that manipulated Mt. Gox's cash transactions were trying to close his account. In addition, no US bank would work with Mount. Gox. This made it basically impossible for Mt. Gox must send them back the money from the users when they try to withdraw their money. Users suffered delays of several weeks or months until the closing of the informal exchange.
In the case of Mt. Gox, the fallout has long dragged on and continues to this day. If history is a guide, we can expect that all the potential benefits of the important problems faced by Bitfinex will also persist. Although this should give many stakeholders in the cryptography industry a break, it is an excellent opportunity to reflect on the state of cryptography in general – and to the # Cryptographic space to do some thinking.
Exchange of implosions
In 2019, the problem is the presence of so many problematic cryptocurrency problematic exchanges. The spectacular failures in which hundreds of millions of dollars have disappeared, in the case of Bitfinex, are not good. The fact that it seems to be happening in the space of five years speaks volumes.
From Mt. Gox crisis documents. Could other failed exchanges try to follow this same game book? Source:CoinDesk
This industry is still young, immature and experiencing growth difficulties. These last problems with Bitfinex are also a learning opportunity. It is now clear that trade without normal banking relationships is the weak link in this volatile market. Today, important traders and funds derive quite a large amount of holdings from the stock market.
Inputs / outputs on BItfinex by value in USD. Activity has increased since the announcement of the allegations. Source: TokenAnalyst
One can understand why the exchange exits would increase in the current environment. It is clear that some exchanges can not be secured to protect cryptocurrency assets.
It's time for some of the best engineers and developers to turn to the most fundamental mandate: compliance and protection of cryptography. As long as trust is not improved, it will be difficult for this industry to grow in the way desired by many advocates.
Attorney Stephen Palley knows that the encryptors want BTC to be worth a ton. Yet this will only happen with a much stronger and more consistent exchange infrastructure. Source: Twitter
What does "guard" really mean?
Cryptocurrency is not limited to computer science. Experts are needed – people with experience in the different arts and sciences needed to save large sums of money.
This is what is meant by "guard". More security, legal, regulatory and compliance experts are needed to push this ecosystem beyond borders. Auditors, accountants and experienced financial operators with enough seasonings in the traditional world. These people should have a vision of the challenges and also the incredible promise of cryptography. And innovations in secured bank notes, such as USDC and PAX, are a good start.
"History does not repeat itself, but it rhymes often." There is certainly a familiar nursery rhyme. It's easy to look back at Mt. Gox and see similarities with Bitfinex and Tether. However, this time, it may be even more complex considering the entries and exits of Tablecoin Stablecoin.
Yet all the same signals, such as the wide price gap between Bitfinex and regulated exchanges such as Coinbase, are there. And we can stop the repetitive scenarios of the type "Groundhog Day". We can do better and not let that happen again.
Bill Murray is stuck in a mysterious time loop in the movie "The day of the marmot". Crypto does not always have to repeat the same mistakes again and again. Source: Moviefone
We may be trying to build a better world at the crossroads of finance and technology with crypto. However, it may be time to recognize that we can learn some we strive to improve financial systems inherited from Wall Street.
It's not a matter of teaching new tricks to an old dog, but rather of a promising young pup who learns some tricks from the old dogs who have been managing money for two centuries.
Mt. Gox Image via CoinDesk Archive.
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