by John | Aug 13, 2016 | Investment Failures, Learning from Mistakes
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.
Source: http://www.coindesk.com/bitfinex-bitcoin-hack-know-dont-know/
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.
Source: http://blog.bitfinex.com/uncategorized/bitfinex-update/
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.
Source: https://www.reddit.com/r/BitcoinMarkets/comments/4xcrup/bfxcoin_discussion/d6ei72p?context=3
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.
Source: http://blog.bitfinex.com/uncategorized/interim-announcement/
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.
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.
by John | Aug 6, 2016 | Learning from Mistakes
Update 11 September 2016 1:23 AM EST
The following was announced on the 9th:
We are pleased to provide an update on our partnership with BnkToTheFuture. As we announced on August 22nd, we are coordinating with BnkToTheFuture to launch a Special Purpose Vehicle (SPV) that will allow the conversion of BFX tokens to equity stakes in iFinex, the corporate entity behind Bitfinex. We expect to release final details and terms on or before Sept. 15, 2016.
As previously reported, we have signed a letter of intent with BnkToTheFuture, an online investment platform, to provide an SPV through which BFX token holders can exchange their BFX for a beneficial interest in iFinex. Since then we have worked on adding functionality to facilitate these exchanges within the Bitfinex platform. Redemption of BFX for the beneficial interest in iFinex will be done at BFX’s face value of $1 US Dollar.
Participation in the SPV will be limited to holders of a minimum of 1,000 BFX tokens. It is principally designed to compensate Bitfinex customers who suffered losses resulting from a security breach that occurred against the company on August 2, 2016.
We are continuing to press forward with our plan to retire as many BFX tokens as possible through the equity conversion.
Going forward, our principal objectives are to raise new capital to help redeem outstanding BFX tokens and fund investment in future growth.
Source: https://www.bitfinex.com/posts/141
The following was announced earlier:
We are pleased to announce the redemption of 1.1812% of outstanding BFX tokens. This redemption was applied pro rata to all wallet balances on September 1, 2016
Update 22 August 2016 11:16 AM EST
From Bitfinex:
We have formally signed a letter of intent with BnkToTheFuture, the online investment platform for financial innovation and technology investment opportunities, to provide solutions towards compensating customers with equity in Bitfinex.
BnkToTheFuture will be providing a Special Purpose Vehicle (SPV) through which qualifying BFX token holders can contribute their tokens in exchange for an equity interest in compliance with their individual jurisdictions. Further details will be released in future announcements.
Source: https://www.bitfinex.com/posts/137
Will “qualifying BFX token holders” include US residents I wonder?
Update 17 August 2016 3:25 PM EST
In addition to providing some general information regarding the hack and assuring everyone of additional security measures, Bitfinex addressed the efforts to compensate affected customers.
From Bitfinex:
We are actively engaged with efforts to convert certain qualifying token-holders to shareholders of Bitfinex and to redeeming the remaining BFX tokens through a combination of new capital and earnings. We have re-enabled most of the features on the platform and are deeply grateful to our customers, who continue to trade with and help us rebuild our brand.
Source: https://www.bitfinex.com/posts/135
Update 10 August 2016 10:15 AM EST
From Bitfinex:
Today, August 10th, 2016, at 16:00:00 UTC we will be enabling additional platform features as we continue to restore service after the incident on August 2nd. Exchange trading will be enabled for all currencies and pairs, while deposits and withdrawals will be enabled for BTC, ETC, ETH, and USD – with LTC and Tether to follow shortly thereafter.
16:00 UTC is 12:00 Eastern.
Source: https://bitfinex.statuspage.io/incidents/7vjycmzlwr85
Update 8 August 2016 2:16 PM EST
Bitfinex PR man Zane Tackett is relaying that US accounts will not be able to trade the BFX token.
Source: https://www.reddit.com/r/Bitcoin/comments/4wng2j/site_relaunch_bitfinex_blog/d69ag74?context=3
Update 7 August 2016 11:06 PM EST
The BFX token will not be tradable for US clients. This is a huge disadvantage.
Source: https://www.reddit.com/r/BitcoinMarkets/comments/4wng7l/site_relaunch_bitfinex_blog/d68gv7y?context=3
Or they “may” be tradable? Unclear.
“The trading of BFX tokens may be restricted for US customers.”
Source: https://bitfinex.statuspage.io/incidents/pckmx0trfq3n
—
Update 7 August 2016 8PM EST
Bitfinex.com is now live and read-only to check account balances.
Source: http://blog.bitfinex.com/uncategorized/site-relaunch/
—
The situation at Bitfinex is very fluid. I’m relaying the facts as I understand them as of writing. I’m not affiliated with Bitfinex and I do not speak for them.
The source for this information (as listed below) is from the Bitfinex status page and Zane Tackett’s reddit posts. Mr. Tackett is the Director of Community & Product Development at Bitfinex.
Facts as of 6 August 2016 at 4:50 PM EST
•119,756 BTC was stolen from Bitfinex on 2 August 2016.
•The value of the BTC stolen at that time was around $60 million.
Source: http://www.coindesk.com/bitfinex-bitcoin-hack-know-dont-know/
•Losses will be socialized across all account values.
•Accounts will be worth 36.067% less than their pre-hack levels.
Source: https://bitfinex.statuspage.io/incidents/8qd35qxs01mm
•For example, even though no Ethereum (ETH) has been reported stolen, ETH balances will suffer 36.067% losses.
•Put differently, if someone had 1 BTC pre-hack, that account balance will now be .63933.
•If someone had 100 ETH pre-hack, that account balance will now be 63.933 ETH.
Source: https://www.reddit.com/r/Bitcoin/comments/4wge37/bitfinex_interim_update_plans_to_compensate_users/d66sy6w?context=3
•BFX Tokens will be issued.
•BFX Tokens *could* be exchanged for equity in iFinex Inc. (Bitfinex)
We are actively discussing various strategic options with numerous potential investors as part of our strategy to fully compensate our customers. Such discussions, however, are in early stages and will likely take time to play out. In the meantime, In place of the loss in each wallet, we are crediting a token labeled BFX to record each customer’s discrete losses. Tokens will be distributed without release or waiver. The BFX tokens will remain outstanding until redeemed in full by Bitfinex or possibly exchanged—upon the creditor’s request and Bitfinex’s acceptance—for shares of iFinex Inc. We are still sorting out many details on this; we will post further updates in the coming days.
Source: https://bitfinex.statuspage.io/incidents/8qd35qxs01mm
•The exchange will come back on within 24-48 hours. (This announcement was made at 11:02 AM Eastern on 6 August 2016. So 24 hours would be 11:02 AM on Sunday 7 August and 48 hours would be 11:02 AM on Monday 8 August.)
•My understanding is that when users can login to Bitfinex, it will only be to check account balances. Initially no trades or withdrawals will be available.
Source: https://bitfinex.statuspage.io/incidents/8qd35qxs01mm
