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The mechanism is: 1. Users have a USD account and a BTC account. They can’t sell their bitcoins and withdraw their cash, but they can buy more bitcoins using t
by davidgerard 9y ago
The mechanism is:
1. Users have a USD account and a BTC account. They can’t sell their bitcoins and withdraw their cash, but they can buy more bitcoins using their newly-topped-up USD account – which contains trapped “dollars” which can’t be used for anything else. Think of it as a Bitfinex “USD” token, not as actual US dollars – Disneyland fun-money which can only be spent inside the theme park. The price goes up. In April, BTC on Bitfinex was often $200 higher than elsewhere.
2. With the higher price on Bitfinex, traders arbitrage by buying coins on an exchange with a lower price and selling them on Bitfinex. (Note that the USD from the sale is stuck on Bitfinex.) This raises the price on the other exchanges.
3. Expectations rise, the price gets mainstream press and more people get into Bitcoin. The bubble inflates.
This works precisely because you can’t get your money out – and other exchanges were also having problems with US dollar withdrawals. Users were reluctant to remove their BTC from Bitfinex because the “price” was highest there (even if unrealisable) and because they loved it as a trading platform.
The trapped “USD” tokens also got used to buy other cryptocurrencies – the price of altcoins tends to rise and fall with the price of bitcoins – and this fueled new ICOs, as people desperately looked for somewhere to put their unspendable “dollars.” This got Ethereum and ICOs into the bubble as well.
FWIW, I described this to Phil Potter from Bitfinex and he thought it was plausible. I don't think they intended a bubble to start, but I do think that's what kicked it off.
I'm not sure if the “USD” were Tethers at this stage, or just funbux trapped there.
- kchoudhu 9y agoIt's an unintentional side pocket. Hedge funds do this to avoid runs on the main fund when assets can't be priced, bitcoin exchanges have inadvertently stumbled on the model due to interface problems with the mainline banking industry.
- gruez 9y ago>1. Users have a USD account and a BTC account. They can’t sell their bitcoins and withdraw their cash, but they can buy more bitcoins using their newly-topped-up USD account – which contains trapped “dollars” which can’t be used for anything else. that doesn't really address my question. the USD have to have come from somewhere, and in both case, it's either natural demand (from people wanting to buy BTC), or a net zero effect (from selling, then subsequently buying).
- davidgerard 9y agoThese were dollars they had deposited before April and couldn't get out again.
- gruez 9y agoYeah, but weren't they intending to buy crypto (why else would you deposit money into an exchange)? The only effect I can see here is people not being able to back out after getting cold feet.