How The Bitfinex Tether Fraud Ends

If you are new to cryptocurrency and don't understand how the market works, you may be wondering why it's so volatile and whether it's safe to invest in cryptocurrencies at all. The value of cryptocurrencies as an asset is governed only by the rate that the buying side of the market is willing to pay. There is no regulatory intervention and the market is intended to be fully decentralized and organic.

This sounds great on paper, but in practice, it opens up a whole another can of worms when bad actors in the market set out to exploit gullible actors. If this were to only hurt the bad actors, it would strictly be a question of ethics. But ultimately, it could have broader implications on the entire network when carried out systematically on a large scale as it happened with Mt. Gox in 2014.

In January 2014, Mt. Gox was the largest bitcoin exchange in the world, handling 70% of all bitcoin transactions worldwide. By February 2014, Mt. Gox suspended trading, closed its website and exchange service, and filed for bankruptcy protection from creditors. Three months later, Mt. Gox was liquidated.

After initially claiming theft of assets, it was later revealed that ‘most or all of the missing bitcoins were stolen straight out of the Mt. Gox hot wallet over time, beginning in late 2011.' The CEO, Mark Kapeles, was charged with fraud and embezzlement, and manipulating the Mt. Gox computer system to increase the balance in an account. Most of the assets in bitcoins have not been tracked down to this day.

Fast-forward to 2017, Bitfinex is the largest and self-proclaimed ‘most-advanced' bitcoin and cryptocurrencies trading platform in the world. What's worrying for the cryptocurrency community is that's not where the similarities end. Indications are Bitfinex could go belly up any given moment just as Mt. Gox did and the implications could be even more far-reaching.

What's Going On With Tether?

Tether is a digital token backed by fiat currency. What is the point of such a token, you may ask? According to Tether/Bitfinex, because the same individuals have been proven to own both companies, Tether is a means of keeping our funds in crypto while protecting us from volatility. Tether must be backed on a 1-to-1 basis by a reserve of fiat currency.

In reality however, Tether has been blatantly leveraged by Bitfinex to manipulate the price of cryptocurrencies. That's a strong statement, you say? It's a statement with merit. Where's the merit?

  • Over 700 million Tether issued in a month, no proof of 1-to-1 fiat backing forthcoming
  • 20 million new USDT were released shortly before a single market buy of approximately $13.5 million USD worth of bitcoin was executed on the 8th of November. This correlation has been a frequent occurrence
  • According to Coinmarketcap, the 24 hour volume of Tether is consistently higher than its circulating supply, often over twice the circulating supply
  • When faced with too many simultaneous withdrawal requests, Bitfinex has frequently cited DDoS attacks and hacking attempts to stall users

So What's Bitfinex Doing?

Bitfinex is issuing Tether and using it to manipulate the price and trading volume of various coins, cashing out high, crashing the market, buying low and repeating the process. This is known as wash trading.

Regulated exchanges have built-in measures against wash trading, such as STPF (self-trade prevention functionality). Bitfinex is not a regulated or even registered exchange. The CSO, Phil Potter is blacklisted by employers in the US for his past shenanigans. All the individuals who run the exchange are of such seedy reputation that they exited the US market altogether citing regulatory incertitude and difficulty securing compliant banking solutions.

As Bitfinex is able to exploit the unregulated nature of the market to self-issue a token and use it to manipulate the price of currencies, it's easy to see where all the ‘fake' trading volume of the ‘world's largest trading platform' is coming from.

Bank What?

Before launching a euro trading pair, Bitfinex secured a bank account under proxy with Bank Spółdzielczy w Skierniewicach which translates to Cooperative Bank in Skierniewice. The little-known bank only has assets of $13 million, which is the volume of trade Bitfinex supposedly handles in roughly 3 hours.

There's no information on who else they're banking with after being ditched by Wells Fargo. There's also no update on the third party audit which Bitfinex promised to carry out in 2016!

Don't Get Bitfinexed!

Bitfinex is a ticking time bomb. Without intervention, it's just a matter of how long they can keep up the chicanery and get away with it. Since Tether is also supported by few other exchanges as well, Bitfinex's counterfeiting of Tether affects not only the exchange but the entire market.

For the time being, you'd be well-advised to avoid Bitfinex and any exchange which supports Tether. Unless users of the exchange take cognizance and steer clear of both Bitfinex and Tether, the trading charts are unlikely to represent anything resembling an organic marketplace.

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