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What a rollercoaster of a week! Prices on Bitfinex, one of the largest bitcoin exchanges rose to just shy of $7800 USD. The only problem is, the rest of the market did not truly follow. To give a simple breakdown of why: Bitfinex has openly spoken on their subreddit about banking issues and customer delays in withdrawing and depositing fiat (crypto withdrawals are fine). Additionally, the entanglement of Bitfinex with the unregulated stablecoin Tether or USDT product has invariably made some people jumpy. This, with a healthy dollop of FUD from crypto twitter and famed Bitfinex and Tether skeptic Bitfinex’ed, caused what seemed to be a mass panic buy of crypto on Bitfinex in order to “exit” the exchange. Although there has been a premium to the crypto on Bitfinex for some time now due to the aforementioned banking issues, the premium rose to around $1000 over the likes of Bitstamp and GDAX, although it has now decreased to around ~$350 USD.
Similar premiums were observed on other exchanges that utilize Tether, but nothing like Bitfinex. On Poloniex, who use the Circle created USDc token, USDt/USDc dropped to as low as $0.51 USDt per USDc. Clearly, the market has become spooked, with Bitfinex and Tether at the center of it.
We wanted volatility back, and boy, have we had it.
So, since this somewhat “black swan” event has all but decimated our shorts at play last week (this is what stop losses are for), what’s in store for us this week? Firstly, trading on Bitfinex should probably be done with extreme caution, not simply due to the continued premium, but also due to counterparty risk involving the continued issues with Bitfinex. Bitfinex has said that they’ll be announcing a new fiat deposit system today sometime, so that could lead to more normalized pricing through eventual market arbitrage. So perhaps the best strategy is to hedge the premium on another exchange.
Essentially, if you believe Bitfinex is fine and will resume normal operations, purchase long futures on Bitmex or Deribit and short/sell spot on Bitfinex. The thinking is that since Bitfinex is at a premium, people wanting to arbitrage it will buy bitcoin from cheaper exchanges, thus raising those prices, while coins being arbitraged on Bitfinex should bring the price lower until equilibrium is achieved. However, if the banking issues and Tether uncertainty remain and the premium rises and become an uncomfortable anomaly within the cryptocurrency market, trading there might become perilous.
Alternatively, if we were to incorporate the new market structure and anti-fud updates from Bitfinex, if the market were to react bullishly to the news that all is well at Bitfinex, there are a few interesting things to note. Firstly, the volume on these “Panic” candles is some of the highest we’ve seen since April 2018. Although the narrative behind the buying could be negative, the fact is, supply was bought. Not quite the same on other exchanges, Bitcoin on Bitfinex has broken out of the down trendline, rejecting the bear pennant and breaking out (after a “fakeout”) of its RSI consolidation triangle. Although the candle has painted a long shadow (large wick), it’s closed a daily candle above local resistance of $6700. The downside rejection was spectacular and the level Bitfinex bounced at created a higher low and ended in a higher high—all bullish structures and arguments. However, we can’t ignore that these structures are tainted and their validity for bullish continuation is definitely uncertain.
As said in a prior article on trading a sideways market, sometimes not trading is also the best trade in an abnormally uncertain market. Right now, there is no real trade unless it’s to hedge the premium and wait for a resolution on Bitfinex.