[This story has been updated to name one source.]
Bitcoin and most of the cryptocurrency complex faced an onslaught of sellers on Wednesday. While some news outlets are pinning the drop on the battle for Bitcoin Cash, sources at a couple of institutions tell Modern Consensus the real culprit is Tether.
The low volatility in the largest and oldest cryptocurrency was shattered suddenly. Bitcoin fell 12 percent in 24 hours, breaking below the $6,000 and at one point changing hands at under $5,500 for the first time in over a year. As of 3:30 p.m. Eastern Time, Bitcoin’s 24-hour trading volume was close to $6.6 billion, according to data from CoinMarketCap. Data from CryptoCompare show Bitcoin’s volume at nearly four times its previous 30-day average.
Meanwhile, Bitcoin Cash sank 18 percent hours before rivaling rules—Bitcoin SV and Bitcoin ABC—are set to duke it out over who will control the network. Craig Wright’s Bitcoin SV is widely expected to win the fight, leaving the potential that Jihan Wu’s Bitcoin ABC will be forked off.
However, selling pressure instead may have come from uncertainty at Bitfinex, the largest Bitcoin marketplace, where over a third of the cryptocurrency’s exchange-traded transactions take place. As of 5:00 p.m., more than 65,000 bitcoins were traded on Bitfinex versus tethers (its stand-in for the U.S. dollar) over a 24-hour period. Second-place rival Coinbase saw 27,000 BTC move around against the greenback.
Driving the volume on Bitfinex may have been a recent change to its rules regarding redeeming Tether, the controversial stablecoin controlled by Bitfinex’s management. On Sunday, Bitfinex announced a 3 percent fee:
“on all external wire withdrawal requests exceeding the following frequency and/or size limits:
more than 2 fiat withdrawals in any thirty day period; and/or,
more than $1M in aggregate in fiat withdrawals in any thirty day period.”
They added that “Regular withdrawals, currently representing the requests of more than 99% of our customers, are unaffected by this change.”
Essentially, this means that large traders looking to take a sizable amount of fiat currencies out of the exchange quickly would be forced to pay 3 percent for it.
But on Bitfinex, what trades as “USD” is really “USDT”—in other words, tether. As Modern Consensus reported in the past, there have been difficulties for some bigger traders to redeem substantial amounts of tether for U.S. dollars.
One way around it for some traders has been to use tethers to buy bitcoins on Bitfinex, transfer the bitcoins to another exchange, and sell the bitcoins for U.S. dollars that can be redeemed.
And at the moment, bitcoins trade at a 5 percent premium on Bitfinex compared to many of its nearest competitors.
That means traders are more willing to take a 5 percent loss on buying bitcoins on Bitfinex and selling them elsewhere than they are to pay 3 percent by putting a request to get dollars back out of Bitfinex.
Or, as Paul Ciavardini, head of OTC trading at Paxos, put it to Modern Consensus, since the Bitcoin price listed on Bitfinex is really denominated in tethers, “the higher price of BTC [on Bitfinex] indicates a lower price of USDT.” Paxos issued a rival stable coin, the Paxos standard, two months ago.
As of 5:00 p.m. Eastern Time on Wednesday, Tether tokens traded at 97.5 cents, a 2.5 percent discount from par.
Roughly half of all exchange trades on Bitcoin against another currency is against tethers. Tether’s token is supposed to be backed by U.S. dollar assets but over the past several months, questions persist over whether the firm truly has dollars backing the stablecoin on a one-to-one basis as promised. Over the past few weeks, Tether has withdrawn about 1 billion of its tokens from the marketplace and has revealed it is now banking at the Bahamian Deltec Bank.
In April 2017, Wells Fargo cut Tether and Bitfinex’s U.S. dollar banking. At around this time, Tether began issuing tokens at a breakneck pace—roughly 2.7 billion of them over the course of several months. Its assets subsequently found a home at Puerto Rico’s Noble Bank but embarked to the Bahamas as Noble’s own financial situation began floundering.