The amount of "swaps" increased again at Bitfinex. Now, there are 30.5 millions (
https://www.bitfinex.com/pages/stats).
Of course, part of this borrowed money hasn't been converted to bitcoins, but only Bitfinex knows the exact numbers (it's a pity, they could disclose the real number; not even the audit gave any number:
https://bitcointalksearch.org/topic/ann-bitfinex-passes-proof-of-solvency-audit-560457).
We can presume most of this fiat was indeed converted to bitcoins. Some might be waiting in the orderbook for a buying opportunity, but not much, because the interest rates are heavy. An exact number would be about 48,700 btcs, but maybe 10% are still in fiat and, perhaps, we have to take about another 10% for litecoin. A reasonable guess could be that the current number of swaps means that about 40,000 btcs were bought with that money.
It's almost impossible to happen, but if these coins were dumped on the orderbook, the price would go to 0.014, since there is only about 10,000 bitcoins bids above 35 USDs.
There are hidden orders, but I doubt it's worthy to insert them at prices lower than 500 USDs. There are no advantages in using them at low prices. We can only speculate about their amount. But the orderbook is so thin that even if they were 10% of the orders, that wouldn't change a thing. Yes, the orderbook has increased, but much less than the swaps.
It's easy to understand why the orderbook is thin. Most people with fiat at Bitfinex prefer to lend it than to sit it on the orderbook waiting for a flash crash. Specially, because there are high probabilities that it will be reversed. All policies have consequences... if Bitfinex protects the lenders, traders act accordingly and become lenders.
Well, with a ratio of 1:2.5, per each 1000 one can borrow 2500. And this position will be automatically liquidated when the loss is about 40%, meaning the taker is about to lose all his original 1000.
If one doesn't use all the allowed margin, of course it will be possible to lose more without being "liquidated". If many borrowers are not heavy leveraged, that can indeed offer more guaranties to support for any drop. But that will also mean that they have plenty of their own bitcoins to dump, if necessary. No one will borrow money if he has his own fiat sitting at the exchange.
It isn't necessary to be faced with a drop of 40% on bitcoin/litecoin to be "liquidated"; many can be already at a loss at current prices, holding long positions on bitcoins from higher prices.
But with so many long traders, a simple fast drop of 10% probably would make some to be liquidated and many to dump their bitcoins and close their positions voluntarily. At current volumes, a dump of 10% of this positions (about 4000 bitcoins) could be enough to take the price down about the same percentage.
Perhaps, the orderbook could endure those dumps: many buyers would insert new bid offers and lenders that just received their fiat back from borrowers could take the opportunity to buy cheaper bitcoins. But it could also lead to a much lower price than, say, Bitstamp, and trigger more dumps, on a domino effect, that we know well from February.
Just remember that under the about 40,000 btcs bought on borrowed money probably are at least more 16000 btcs (1->2.5) owned by the borrowers and supporting their margin, plus many more from bitcoiners that don't borrow.
Most trades done at a price lower than 40% of the original long trade won't give enough to pay to lenders their principal.
Can we really say there is no risk of this to happen? It isn't necessary a real bad news, like a cracking on the chinese exchanges by their Government. We might just need a wild bearish move of about 10% to trigger it.
Yes, they can reverse the dumps. If the dump is limited to Bitfinex, they can solve the problem. But, as a few already wrote, if the dump is general, even if worst at Bitfinex, that might not be possible.
And this isn't a long traders' problem or even of lenders. Bitfinex promised to support any lenders losses, so they can go down with all of its customers. Clearly, they couldn't keep the exchange open after a huge loss if they didn't at least promise to pay back the losses of lenders. The effect on their reputation would be too damaging.
Shouldn't the simple risk of this to happen make Bitfinex take new measures?
It isn't helpful to change the ratio of liquidations, like closing positions when the loss is already at 30%. That could only start crisis more frequently. The problem is: there are huge leveraged positions, very high numbers of bitcoins at the exchange, but a small orderbook. In a crash, potential supply seems to drastically outstrip demand and even potential demand, because many fiat owners are at the exchange to lend and not to trade.
Of course, that could be achieved by decreasing again the margin allowed, to 2 on 1 or even 1.5 on 1, in order to limit the "swaps" volume.
That would also decrease the interest rate (I'm talking against my short term interest, since I'm a lender most of the time), taking away incentive for customers to lend money and compelling them to, in absence of alternatives, to insert bid orders.
The fees policy, favourable to people that bring liquidity to the orderbook, helped. But it isn't enough. Returning to Bitstamp could solve the problem.
Also, Bitfinex have to state clearly on their TOS that they reserve the right to reverse trades when the prices were manifestly determined by a transitory lack of liquidity caused by the automatic liquidation of positions as well as the terms of liquidation of positions. Bitfinex is closing customers positions without any clear statement on the TOS. FAQ isn't enough unless you make a reference to their content as part of the TOS. Since Bitfinex is dealing with millions, expect lawsuits otherwise. You are no longer dealing with anarchist kids...
This isn't FUD, I'm an old customer of Bitfinex and want to keep using them. I think any accusation of scam or similar against Bitfinex have no foundation whatsoever. But I'm also apprehensive with present levels of swaps taking in account the thin orderbook.
