I want to give credit to Bitfinex. They paid back all their IOUs by redeeming 100% of all BFX tokens.
These BFX tokens were issued as a placeholder for Bitfinex account holders who received a haircut of 36% when 119,756 BTC was stolen from Bitfinex on 2 August 2016.
Back in January I sold my remaining BFX tokens for .55 USD per token. If I had held onto them today I would have gotten 1 USD per token.
With the benefit of hindsight that was not the best call.
However, it’s pointless to evaluate a decision based on information that wasn’t available at the time. I don’t think I could have known that Bitfinex was going to aggressively redeem the IOUs at such an accelerated pace.
With that in mind I made the best decision I could with the information available to me at the time.
I wrote back in June of 2016 in an article Ethereum Cloud Mining is Not Profitable. Today is exactly 1 year since I purchased an Ethereum cloud mining contract at Hashflare.io. As I recapped in that article:
In order to simply break even ETH would need to trade up to around 18.7 USD.
I would also be better off if I had just bought ETH.
That article was written about 3 months after I had made the investment in Ethereum Cloud Mining.
I wish I had done the in depth analysis in that article before I made the investment in Ethereum Cloud Mining so that I would have known not to make the investment.
And that is the lesson I learned:
Perform your due diligence before making an investment!
An artist’s representation of how I envisioned Ethereum Cloud Mining would go
I attempted due diligence but I did not consider all the relevant facts. These relevant facts were available to me at the time if I had known to look for them.
Since my mining contract is up I want to recap what actually happened with the benefit of all the facts.
The main beneficiary of my bad experience is anyone who is newly considering Ethereum Cloud Mining: caveat emptor.
There might be other cloud mining services out there that are profitable but in my experience Hashflare.io was not one of them.
Ethereum Cloud Mining Recap
On 21 march 2016 I spent $561 for a cloud mining contract at Hashflare.io. Ethereum was trading at $10.81 at the time. In the one year of mining I mined 41.27 Ethereum. As of writing Ethereum is currently trading at $42.6.
So that 41.27 Ethereum would be worth $1,758 if I had held onto all of them and then sold today.
This is a $1,197 gain which sounds nice but it really isn’t and I’ll explain why.
Why a $1,197 Gain Wasn’t Very Good
But what if the price of Ethereum had not gone up 294%?
An artist’s representation of how Ethereum Cloud Mining actually went
What if it had stayed the same price of $10.81. Those 41.27 Ether I mined would be worth just $446.
What does that mean?
It means: The gain was entirely due to the increase in the price of ETH–the mining itself was not profitable.
In fact, if I had taken $561 and just purchased Ethereum directly, I could have acquired 51.89 Ethereum, which at current prices of $42.6 would now be worth $2,210 or a gain of $1,649.
So other than sounding cool Ethereum Cloud Mining through HashFlare.io provided no value.
The Problem with my Analysis
The downfall of my analysis when initially evaluating the investment in Ethereum Cloud Mining was assuming linear growth in hashing power of the Ethereum network.
I explain this in more detail in my original article and I also provide a process for making more accurate predictions wether a cloud mining contract will be profitable or not. Using that process I predicted I would mine about 30 ETH.
This prediction was much closer to what I actually mined compared to the 120 ETH predicted using static models.
It was a tough lesson to learn but thankfully the amount at risk was relatively small at $561.
Bitfinex was hacked back on 2 August 2016. About 36% of Bitfinex holdings were stolen. All Bitfinex account holders took a 36% loss and were issued one BFX token for each dollar-equivalent in value that was lost.
BFX tokens are basically “IOUs” specific to Bitfinex. I was issued the 313 BFX tokens since I had lost 313 dollars.
BFX tokens were then made tradable and the price plummeted from a 1 to 1 parity with the dollar down to a fraction of a dollar.
This enabled folks to close their BFX tokens and get some of their money back immediately. Or they could choose to hold onto the BFX and wait for Bitfinex to raise capital to make good on these IOUs.
I was fairly upset for a while about this hack and my loss. I withdrew the remaining 64% of my holdings from Bitfinex and I didn’t login to Bitfinex for a while.
But one of my readers informed me that he was going to be investing some more money in margin funding at Bitfinex and that got me interested again.
Plus I still had 313 BFX tokens sitting in my account.
BFX Redemptions are Slow
About a month after the hack, in September 2016, Bitfinex started redeeming BFX tokens for dollars at a 1 to 1 parity. They essentially began making good on the IOUs they’d given out.
I received $17 in BFX token redemptions between 1 September 2016 and 7 January 2017. Bitfinex most recently redeemed 2% of all outstanding BFX tokens on 10 January.
I calculate that if it took four months to get $17 back it will take over six years to get the rest back.
Because the rate of redemption is so slow I sold my BFX tokens for dollars at a rate of .55 USD per token.
I’ve started margin lending using these dollars.
Why go back to Bitfinex after their security breach cost me 36%?
My thought process is that Bitfinex was hurt so much by the last hack that they are hyper-vigilant now. They’ve implemented additional security features such as two-factor authentication and offline, cold wallets.
Bitfinex is the only game in town I’m aware of that allows users to do margin funding.
And I want to recoup my losses. As of writing the “Flash Rate of Return” for margin funding is .07% per day. So based on my calculations I should be able to get back to $313 in about 3.5 years.
That is assuming the FRR stays at or above .07% per day. Hopefully it goes up.
Bitcoin is Volatile
Bitcoin Price Projection Diagram
I think margin funding is a great way to take advantage of the popularity of Bitcoin without the exposure to BTC price fluctuations.
BTC is volatile which is something that traders like.
In January Bitcoin started around $950 went up over $1,100, then back down to roughly $800.
Do These Price Fluctuations Matter?
If I believed Bitcoin was a great long term holding I don’t think I would care about these price fluctuations. A big run-up would be a time to take some money off the table and a big drop might be a time to increase my holdings.
Some people like holding BTC and believe it will go “to the moon” but I am somewhat skeptical of Bitcoin as a currency and I don’t know that BTC will be valued higher 10 or 20 years from now than it is today.
I prefer gold over Bitcoin because it has a 3,000 year history of being valued; but as I’ve said before, you can own both (I do). I just choose to own much more gold than Bitcoin.
I still like Margin Funding
By being a margin lender (in my case with USD) I’m not exposed to Bitcoin price changes and there is a set rate of return each time funds are lent out. From a market perspective there is no BTC price risk.
There is USD debasement risk. But the main risk, as I learned, is hacks.
There is also counter-party risk but I believe Bitfinex to be a reputable company.
Of course I wish they had better security so they never got hacked in the first place but I think they handled the situation fairly well and have taken a lot of steps to increase security.
It is too bad for that folks in US are not eligible to buy BFX tokens (if I recall correctly they were selling for .33 USD at one point and are now at .59, that would have been a good trade).
Citizens of the land of the free were also not eligible to partake in the BFX token-for-equity-programs–onerous US regulations are to blame for these restrictions.
I discuss the benefits of margin funding in more detail in my article Margin Funding to Generate Passive Income. I do think that it is a market-safe way to grow wealth, but the risk of future hacks is not something to be taken lightly.
If you do decide that signing up for a Bitfinex account is right for you, use this link: Bitfinex.
Below is a summary of the option trades I closed in the month of September.
If you’re not familiar with stock options you might first read my introductory article Get Started Trading Options.
Monthly Trade Summary
September was a tough month. In total I lost $602.03. My win rate was 69% (9 out of 13). I had a total of 19 positions throughout the month: 9 of my trades were profitable, 4 were not, and 6 were “wash” trades. If I gain or lose less than $20 I count it as a wash and don’t use it to calculate my win rate.
My account is about $10,000. Some of my margin usage includes other options trades not listed here because they are made based on the trades placed by Kirk DuPlesis over at OptionAlpha.com and I am not going to post those out of respect for his paid service. I’m also NOT including any profits or losses from the OptionAlpha trades I make.
Again, the trades listed below are MY trades closed out in the month of September.
What I learned from losing $600
You can often learn more from mistakes than successes. It’s easy to Monday morning quarterback with the benefit of hindsight. I like to evaluate my trades based on what I knew at the time and what I reasonably could have foreseen.
I learned/reinforced several valuable lessons. In fact if I had followed the rules I know I need to follow to be successful and I had been more careful that $600 in losses would have been ~$70 in gains.
I want to talk about my three mistakes and the three lessons I learned from each.
Lesson One: Small Position Size
“Bears make money and bulls make money. Pigs get slaughtered.” – Old Wall Street Adage
Novavax (NVAX) Strangles
Notes: My biggest mistake was with NVAX. I made $104 earlier in September but I counted this as a separate position because I completely closed out the previous position and opened this new one.
The reason volatility for NVAX was so high was because the company was awaiting “phase three trial judgment” for a vaccine they were making. The results of the trials were unfavorable and the stock tanked down to around $1.25 from $8.25. In other words the stock lost 80% of it’s value in one day.
I would have been fine if I hadn’t opened the additional 9 8 strangle because it would have been just a ~$300 loss. I got greedy like a pig and paid the price. My account is around 10k, so I should not open a position with a margin requirement over $500 (5%). The initial margin requirement started at $420, but when I opened the 9 8 strangle the margin requirement roughly doubled.
I will cheat up around $100-$150 to open positions in the $600-$650 range because otherwise I wouldn’t be able to open some positions, but when possible, I must keep the position size at or under 5% of the total account value in order to be successful long term, which in my case is $500.
Margin Requirement/Cost: $420 up to $840
Income: -$595.78 (-$582 less commissions and fees)
Lesson Two: Careful Order Entry
ScanSource (SCSC) Earnings Strangle
Notes: This was initially an earnings trade back on August 29. ScanSource missed earnings by a lot and the stock tanked. In after hours post earnings the stock traded down to 37.79, my break even was 37.65. I made an adjustment and held onto the position in hopes of a rebound. The stock did rebound and cut my $330 loss down to around $230.
But then I made a mistake buying the put back for more than I sold it for by entering my limit order incorrectly at the ask price instead of the midpoint. Tough $250 lesson to be more careful particularly in a less liquid market.
Margin Requirement/Cost: $875
Income: -$461.17 (-$449 less commissions and fees)
(VIP) Earnings Strangle
Notes: I opened this up incorrectly! I reversed the call and the put to create an inverted strangle. Closed it out when I could for a small wash loss.
Margin Requirement/Cost: $615
Income: -$18.20 (-$6 less commissions and fees)
Lesson Three: Be on the Correct Side of Volatility
When volatility is low (less than 60%) you want to be a net buyer of options. When volatility is high (over 60%) you want to be a net seller of options.
Adobe (ADBE) Earnings Iron Condor
Notes: This was an earnings trade and I was on the wrong side of volatility. The implied volatility percentile of ADBE was 58%. When selling options you want the implied volatility to be over 60% and the higher the better.
Margin Requirement/Cost: $500
Income: -$126.16 (-$114 less commissions and fees)
Combined these three mistakes cost me $674.36. I expect to lose on some trades and that is okay. For example, I lost on the Verifone earnings trade. But because I was on the correct side of volatility, had the correct position size, and chose a stock with a consistent post earnings volatility drop, I was in a good position to win most of the time. However, these trades listed above are examples in which I could have known not to make and were preventable.
The Rest of My September Trades
Lands’ End (LE) Earnings Strangle
Notes: This was an earnings trade that went according to plan. Closed it out at the at the 50% profit target.
Margin Requirement/Cost: ~$600
Income: $35.72 ($54 less commissions and fees)
Corrections Corp of America (CXW) Straddle
Notes: There was a lot of volatility for this stock when there was an announcement that the department of homeland security was reevaluating using private prisons. A lot of these contracts are at the state level, so I thought the move would be overstated. Closed at 25% profit target once volatility died down.
Margin Requirement/Cost: ~$500
Income: $40.92 ($47 less commissions and fees)
Smith and Wesson Holding Company (SWHC) Earnings Strangle
Notes: Another successful earnings trade. My position size was too big but I was fortunate in that it worked out in this case. Was able to close it out at the 50% profit target
Margin Requirement/Cost: ~$940
Income: $125.80 ($138 less commissions and fees)
Infoblox (BLOX) Earnings Strangle
Notes: Another earnings trade. They announced earnings on August 31. Implied volatility on 2 September had dropped from the 86 percentile down to the 2nd for this stock, but the option pricing didn’t reflect that, IV dropped but was approaching my break even so I just closed for a wash/small loss.
Margin Requirement/Cost: ~$600
Income: -$1.08 ($5 less commissions and fees)
NYMOX (NYMX) Strangle
Notes: There was a lot of volatility for pharmaceutical stocks. Probably related to the EpiPen outrage. Not enough liquidity but was still able to close for a profit.
Margin Requirement/Cost: ~$635
Income: $37.80 ($50 less commissions and fees)
Namtai (NTP) Strangle
Notes: This was another stock trading with high volatility due to an announcement. Not sure how much volatility dropped but time decay certainly helped. Closed at 50% profit target.
Margin Requirement/Cost: Not recorded
Income: $28.92 ($35 less commissions and fees)
Energous Corp (WATT) Earnings Strangle
Notes: Bad Q2 earnings, net short position, high 88th percentile IV, was able to close at a 50% profit target after waiting a little while.
Margin Requirement/Cost: $535
Income: $83.92 ($90 less commissions and fees)
United Natural Foods (UNFI) Earnings Strangle
Notes: I calculated an expected move of +/- 2.77 from 41.80. Didn’t move hardly at all and was able to close the next day for a nice profit. Margin requirement was too high but I didn’t get burned on this one.
Margin Requirement/Cost: $837
Income: $115.92 ($122 less commissions and fees)
Novavax (NVAX) Strangle
Notes: I counted this as a separate from the other NVAX position because these were September options and I closed them completely out before opening a new NVAX position. NVAX was trading with high volatility. Closed this in phases. Added a smaller strangle, which turned out to be ill advised. My initial position had a smaller margin requirement.
Margin Requirement/Cost: ~$650
Income: $104.32 ($147 less commissions and fees)
Aralez Pharmaceuticals (ARLZ) Strangle
Notes: Another pharmaceutical stock trading with high volatility, resumed trading on Thursday 9-15 and was able to close at well over a 25% profit target.
Margin Requirement/Cost: $582
Income: $147.70 ($166 less commissions and fees)
Finisar Corp (FNSR) Earnings Strangle
Notes: Had a big earnings beat, stock went up as high as 26.5 after hours. My break even on the upside was 26.61. Had a very nice drop in implied volatility. But didn’t matter as much since it moved beyond my range. Made some adjustments. Dropped down allowing me to close my original strangle, had a long position on FNSR to make up some of the losses. Closed on the 21st for a wash.
Margin Requirement/Cost: $490
Income: $17.79 ($33 less commissions and fees)
iShares Mexico ETF (EWW) Iron Condor
Notes: Somewhat high volatility, took a neutral position because I think when the fed does not tighten it will help the emerging markets. Perhaps should have gone a little bullish. ETF approached by upper call, so closed out the short call on the 21st. Maybe could of held onto it, but didn’t want the risk.
Margin Requirement/Cost: ~$328
Income: -$1.25 ($14 less commissions and fees)
General Mills (GIS) Earnings Iron Condor
Notes: I prefer the strangle, but did this risk defined iron condor because of the margin requirements and position sizing. Standard earnings trade. Got some implied volatility drop but not as much as the last two earnings sessions. Closed for a wash.
Margin Requirement/Cost: $500
Income: $9.60 ($34 less commissions and fees)
VeriFone Systems (PAY) Earnings Strangle
Notes: Beat earnings but stock tanked beyond my break even. Adjusted the call side down for some additional credit, and hopes that the stock rebounds some. Adjustment ended up costing me more $.
Margin Requirement/Cost: ~$640
Income: -$266.64 (-$242 less commissions and fees)
KB Home (KBH) Earnings Strangle
Notes: Earnings trade. Got a nice drop in volatility but stock was approaching my break even on the high side and decided to close out for other opportunities.
Margin Requirement/Cost: $280
Income: $17.96 ($24 less commissions and fees)
Nike (NKE) Earnings Iron Condor
Notes: Another earnings trade. This one had a nice setup. NKE has a nice volatility drop after earnings, there are month contracts (which have the most volatility “juice”), and IV percentile was at 72%. I’d prefer volatility was higher, but 72% is certainly high enough for an earnings trade. I did a defined risk Iron Condor since the margin requirements are high. Nike announced earnings after hours, they beat, but the stock sold off. As of 10PM in after hours NKE was at 54.09, just hope it holds tomorrow and volatility drops! IV dropped to 28%, and with it the value of the options I sold plummeted. This was a textbook trade, if I could do this 2-3 times a week I’d be thrilled, but unfortunately these types of trades don’t come along every week.
Margin Requirement/Cost: $600
Income: $101.65 ($120 less commissions and fees)
I have several credit cards. All of which I pay off each month.
I have one that I use for most of my expenses: groceries, petrol, utilities, etc. I have it set to be paid automatically each month.
I have a few others that I rarely use unless I’m making a purchase at a specific store. With those cards, I try to pay them off as soon as I make the purchase.
Well this month I made a mistake. I forgot to pay one of my rarely used cards off. I was alerted to my omission the other night via text that I was hit with a $25 late fee.
Ugh. I hate that.
I immediately paid off all my balance. Then I called up the bank and asked if there was anything they could do about the late fee. They said my account was in good standing and they would waive the fee.
Now I don’t think my bank had to do this. After all, they might say “I’m sorry, your payment was late and we can’t help you,” in which case I will have lost $25.
But you don’t know unless you ask.
I had a similar thing happen with another credit card. This time with a card for which I had auto-pay setup. I had gotten a new card number due to my previous card being compromised and didn’t realize I needed to change my auto-pay settings for the new number. So I was being charged fees and interest.
The Phone I used didn’t look like this.
I caught it within a couple days, called up the bank and got the fees reversed.
I then went in and setup my auto-pay. In this second case I don’t feel as responsible, since I had auto-pay setup, but it is another example that you just have to ask.
Plus if your bank says no, that might be a good reason to take your business elsewhere.
On August 2 Coindesk reported a hacker stole some $60 million worth of Bitcoin from the Bitfinex exchange. Altcoins such as ETH, ETC, LTC on Bitfinex were not stolen by the hacker.
Bitfinex decided to “socialize” the losses in what they claim would be similar to a bankruptcy liquidation.
All account holders on Bitfinex at the time of the hack received the newly created BFX tokens equal to roughly 36% of their pre-hack balance in place of the losses.
The tokens were issued at a one token to dollar parity. For crypto currency balances the value was based on prices announced by Bitfinex.
Interestingly before trading was live the ticker already priced BFX at .80 per token–a 20% discount.
As of writing tokens are trading down around $.36.
But this low price creates an opportunity for the exchange Bitfinex. They could buy their own tokens back at a huge discount and then forgive their own debt.
Debt Buyback: An Example
Let’s say you borrow $100 from your friend Robert. You give Robert a piece of paper promising to pay him back (an “IOU”).
You fall on hard times and Robert is convinced you won’t make good on your promise to pay him back so he decides to cut his losses.
He sells the IOU to Susan for $25. Robert figures $25 is better than $0.
Susan holds the IOU for a little while but then decides she wants the money. She offers to sell the IOU for $30.
You could buy your own IOU back for just $30 and then forgive the debt to yourself.
In other words you’ve just gotten $100 for $30.
See where I’m going with this?
While no one voluntarily loaned money to Bitfinex in exchange for the BFX tokens my hypothetical example above is very similar to the position Bitfinex finds itself.
Bitfinex public relations man Zane Tackett claims they do not buy their own debt on the exchange.
I have no evidence that Bitfinex is buying their own tokens. But there is a strong incentive for them to do so.
BFX Token Losers
From my perspective the tokens are a huge disappointment.
The tokens pay no interest, no dividend, and there is no timeline on when the tokens will be repaid or even if they will ever be repaid.
“However, no property held back will be used to pay dividends to current shareholders unless and until our customers are repaid.” Emphasis Added.
The best people like me who were assigned the token can hope for is Bitfinex will pay the face value back in full as soon as possible.
I don’t see how the BFX tokens will ever be worth $1 or more via trade. If Bitfinex releases a legally binding repayment plan I could see the token value approach $1. For example, if Bitfinex announced BFX tokens would be repaid on 8/14/2016, they might trade up to $.99 per token leading up to the payout for people to make .01 per token in one day.
Why is that the case? Because a rational investor will not voluntarily buy an instrument today for the promise of the same (or less) amount in the future. A rational investor wants to be compensated for the time value of money.
Plus there is a lot of risk that the amount will never be repaid. The BFX tokens are reward-free risk for anyone assigned the token.
It beats just taking the full 36% loss, but falls far short of my hopes for interest, equity, tradability (for US clients) and a set maturity.
Presumably the tokens could be held to “maturity” at which point Bitfinex would buy them back at face value but if maturity is 1 or 100 years from now, tomorrow or never, no one knows.
That could be a long time with no interest which is a big fat loss both in terms of lost opportunities to invest the money elsewhere and purchasing power lost due to price inflation.
BFX Token Winners
As mentioned earlier in this article, if Bitfinex were to buy back their own debt at current token prices they would be saving 64% on their outstanding debt.
Other winners could be risk loving speculators. With the token trading at just $.36 speculators who believe that Bitfinex will buy the tokens at face value could buy BFX tokens at a huge discount.
For example if I could buy BFX tokens for $.36 each and I knew I’d get a dollar for them in a year it’d be a no brainer investment.
But since their isn’t any interest, no set maturity, and no guarantee if the tokens will ever be repaid, the BFX tokens are little better than putting your money on red at the roulette table.
Roulette or BFX Token: Which is riskier?
What is a Bitfinex Client to do?
If you were assigned BFX tokens at face value and you’re a US resident you’ve only got two options. The first is sell the BFX tokens to cut your losses. The second is to hold onto them and hope they go up in value or are repaid.
If you’re not in the US you could double down and buy BFX tokens to decrease your BFX token cost basis, but I think this is super high risk.
I’m still sitting on my BFX tokens to see what happens. At some point I may cut my losses and sell them but I haven’t made a decision yet.
If you feel like gambling and you’re not a US resident you could buy BFX tokens and hope Bitfinex pays them off. But with no set maturity, no guarantee of repayment and no interest it’s certainly not investing.