Topic: Caution advised when using Bitfinex - High default probability - page 2. (Read 3741 times)

Hi everyone,

I do frequent cryptocurrency exchange reviews, and as I got to Bitfinex (BFX) my attention was immediately drawn towards their liquidity swaps. They reveal a substantial amount credit risk when using Bitfinex. In fact, the market derived probability of default for the exchange over a one year period can be determined at somewhere between 39.59% and 52.79%. This depends on whether you assume to lose 75% or 100% should the exchange actually default, but in any case a higher recovery rate would not be reasonable given ISDA standards.

For full details how I get to these numbers, check out: http://digiconomist.net/caution_advised_when_using_bitfinex/

To put it differently, the chances of losing at least 75% of your money on Bitfinex is well over 290 times larger than the chance that you will lose as much by simply holding Bitcoins in cold storage. I based that on the current 1 day volatility of Bitcoin, included in the details. Obviously, a default probability of at least 40% does not need comparisons to show that it is pretty bad.

These numbers would only be incorrect if market prices aren't "right." The problem is, markets are always right, unless there is some manipulation involved. If that would be the case, then there would be even more reason to avoid BFX. After all, it wouldn't be more than a scam-platform. I have no evidence that this (manipulation) is happening, just pointing out that it wouldn't improve the conclusion: putting money on BFX should be considered a very high-risk activity. Especially liquidity providers should be aware that by providing liquidity at BFX they are running a bigger risk than by buying into Bitcoin.