October 14, 20184min768

What’s Causing 2% Bitcoin Premium on Bitfinex? Possibility of Arbitrage

On Bitfinex, a leading cryptocurrency exchange, Bitcoin is being traded with a 2 percent premium based on the current price of $6,285.

As BitMEX Research revealed, the premium of Bitcoin on Bitfinex continued to increase throughout the past week, during a period in which Tether (USDT) started to demonstrate a decline in price.

Currently, on Bitfinex, all traders are requested to purchase or sell major cryptocurrencies like Bitcoin and Ethereum with USDT, due to the suspension of deposits into the exchange’s HSBC banking account.

As the price of USDT fell from $1 to $0.098, by around 2 percent, the premium of Bitcoin on Bitfinex increased by a similar margin.

Why Tether is Going Down

Speaking to CCN, Alex Kruger, a prominent cryptocurrency trader and analyst, stated that the decline in the price of USDT, which is supposed to be pegged to the value of the US dollar on a 1:1 ratio, is attributable to three factors:

  1. Traders moving to audited and regulated alternatives like Gemini USD and Pax
  2. Traders selling USDT to purchase cryptocurrencies
  3. Concerns around banking services obtained by Tether LLC

Particularly, due to the bankruptcy of Noble Bank and the unclarified relationship between Bitfinex and HSBC, it remains unclear whether users can still redeem USDT at its base price of $1.

While Tether LLC proved its holdings of more than $2 billion in September of last year, it has not carried out an audit since and crucially, it failed to communicate with the community in regards to the partner bank of Tether that is holding USDT in circulation.

In an interview with CCN last week, Kruger explained:

“USDT can be redeemed at Tether for USD, yet Tether does not destroy the redeemed Tether, only takes them out of circulation i.e. only USDT in circulation are fully backed by USD. This could eventually pose a problem.”

He further added that the premium of cryptocurrencies on Bitfinex is solely triggered by USDT, which justifies the spread between USDT-integrated exchanges and US dollar accepting platforms.

“That is very probably behind coins trading at a premium in Bitfinex (exchange associated with USDT and the distribution point for all USDT) and in USDT denominated exchanges such as Binance and Kraken. At a premium relative to spot exchanges such as Coinbase and Bitstamp. And at a premium relative to Bitmex’s perpetual swap, which is based on an index composed of prices from spot exchanges.”

Possibility of Arbitrage

Traders could theoretically take advantage of the premium cryptocurrency prices on Bitfinex by selling cryptocurrencies like Bitcoin and Ethereum on Bitfinex. But, traders can only sell them in exchange for USDT due to the suspension of deposits on the platform.

Traders that attempt to executive an arbitrage trade on Bitfinex has to take into consideration the short-term price trend of USDT, as there exists a significant risk that the price of USDT will continue to fall below the $0.98 mark.

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