FUD-Filled Friday

 

This Friday we saw some fairly significant news prices and market responses revolving around two companies: Digitex Futures and Bitfinex/Tether. In both instances, the market reacted negatively however with different magnitudes which is worth exploring what this may mean moving forwards.

Digitex futures

The news coming out of the Digitex Futures project was by far the most grim and unfortunately affected a good few of us in the RSC community. In essence, Adam Todd the CEO came out with a video on 27 April which confirmed that the exchange was not fit for purpose and thus the public beta launch was postponed until further notice. The Digitex Team has attempted to hit a number of launch dates in the past with this one being the third attempt which missed the mark.

 

The market response was an appropriate crushing of the DGTX token price from around $0.09 back down to $0.02-$0.03…

 

Essentially the exchange development which was outsourced to a relatively reputable company Spotware was not fit for purpose and had significant issues. The product missed the brief and made the platform unacceptable for public issue. The big issues noted by Adam in the media release were:

*Lack of a 24-hr volume figure which is a necessary tool for traders to understand relative activity on the exchange both intra-day and over time
* No spot price for the instrument which is reportedly impossible to add in the current build. The fix is an unfortunate need for additional windows in the interface. This is completely unacceptable and hard to understand how this was ever missed as a feature by the Spotware team.
* Unable to sell a contract due to the need to post additional margin. Strangely this is again reported by Spotware as a feature not a bug and is really the game over point for this iteration of the software.
* The exchange has in-built commissions due to the way the rounding up of orders sold/bought at different prices works. The Market Maker bots were effectively losing money even though they were trading against themselves. Wait…What?!

 

 

The released video from Adam Todd showed his frustration with the product developed by the Spotware team and was very much an unedited and raw admission. From an objective standpoint, it looks like the management of this round of development was nowhere near active enough on Adam’s part to catch these issues early enough in the process. Further to this, their media release added fuel to the fire by contrasting to the videos of Adam using the exchange on 19 April which seemed to show an all clear on the system instilling some market confidence.

 

As a result, the pent up anger and frustration on the latest postponement has been taken out on the DGTX token price. It will take a significant amount of engineering effort and confidence rehabilitation for this project to regain any reputation points and market confidence. Personally, I see the DGTX token remaining at these levels for a good while yet.

 

Adam has grit and he clearly wants to push the ball up the hill at any cost. Its not that it cant be done, I just don’t expect the DGTX token price to reflect any good news until the exchange is up an operational. The best path forwards in my eyes is for Adam and the team to fade into the background and Phoenix at a later date with a fully operational product. Until then, stay out of the limelight. This is the price paid for failing to deliver a product off the back of a heavily hyped up token value…thrice.

 

Some key points to consider for any holders of DGTX moving forwards:

1. Good news may have little positive effect on token price for a good while.
2. Development is set-back a good many months, I would not be surprised if we don’t see anything significant for 12 to 18months.
3. There are a lot of angry investors with good reason to level a legal challenge against the Digitex team. It’s a regulatory grey area but there has absolutely been misleading commentary and coordinated pumping of price and sentiment by the team. This is a no-no in traditional markets and will not do them any favors. The ICO model has its own problems so we will have to see where this all ends up.
4. Money will start to run thin now, the Treasury is unlikely to have high throughput which puts constraints on what can be achieved with the money they have to date. This will be a challenge for Adam and the team to overcome and again a problem we will see a lot of in the crypto industry from here on.

 

I hope one day the vision becomes a reality but for now am not holding my breath. For anyone who got caught on the wrong side of this event, there will always be new opportunities and learning from events like this is all part of the trader’s education. It can be expensive, but so long as you don’t repeat the mistakes, you become stronger and will be ready for next time.

Tether – who saw this one coming?

Everyone did, really. Who is honestly surprised that Bitfinex printed Tether to cover shady expenses and losses?

 

The crux of this one is that Bitfinex used Tether printed to the tune of $850Million to cover losses on the exchange without informing creditors both corporate and individual. Further to this, the New York State Attorney General (NYSAG) is launching legal action against the two entities Bitfinex and Tether to uncover the alleged fraud occurring on the platform.

 

Tether’s history has elements of shady banking, comingling of funds, inability to redeem USDT for USD, locked withdrawals, subpoenas all over the place, zero reliable audits, failed or insolvent bank, legal and audit agreements and non-other than Brock Pierce (lead of Blockchain Capital BCAP) involved at the helm (surprise!).

 

I must highlight how important this is to understand. Blockchain technology allows bad actors to print money. Tether does it. Binance does it. ICOs do it. These coins and tokens are worthless until someone pays for it. However, just because someone paid for it doesn’t mean its not worthless. We must look under the covers to see what is actually underlying these “assets” because in many cases, the truth is they are underlain by and agreement that you the investor have no voting rights, no dividends, no ownership, no utility and no physical asset…no worries!

 

For those who were around in the 2017-18 market, you will remember that there have been allegations of USDT being printed and subsequent price pumps in BTC were commonplace. The notion that Tether has never been backed 1:1 with real USD persists and we remain to this day without a transparent audit to come to any other conclusion. What really baffles me is just how USDT maintains such a high dominance in the stablecoin market.

Figure 1: Stablecoin market capitalization as reported in Circle’s 1Q19 Retrospective Report

The most likely reason for Tether dominance is that USDT has a longer history of existence and is utilized across more token pairs on more exchanges. Not least is USDT being the dominant stablecoin on the dominant alt-coin exchange Binance.

 

A crude check of exchange volume shows that Tether’s questionable ethics are in good company. Some of the highest volume “top” exchanges that we all know, love and trust with our life-savings support its use. If we back out all of the wash-trading and fake volume, I would expect that the vast majority of Tether trades on Binance which further adds to the risks that CZ is willing to take on.

 

I would be very surprised if Binance is not bankrolling some of the legal protections of Tether until CZ can get enough adoption of other stablecoins to get out from under this sinking ship. Many of the massive risk we see across the industry are intertwined with a handful of unsavory individuals and eventually, the chickens will come home to roost.

Figure 2: Top exchanges by volume of USDT transacted. We all love wash-trading it makes the crypto world go around…

The market reacted negatively to this news…but also not really. We saw some red on the BTC/USD chart but nothing that Doc hasn’t been talking about from a most likely technical analysis standpoint. The USDT/USD chart shows a more appropriate break from the peg and all pairs on the Bitfinex platform still trade at a premium from Nov-Dec 2018 when the last major Tether insolvency news broke.

I believe that the market already believes that Tether is a scam and has priced any risk into the market. This news will have little effect outside USDT and Bitfinex and other shady exchanges using it as defacto stablecoin.

 

The core action out of this is to avoid Tether and make use of the multitude of better stablecoins out there like USDC, TUSD, GUSD and DAI. For those of you with coins on Bitfinex, the same advice goes for that I put out on Binance last week – not your coins, not your crypto, get your coins off exchanges.

Last thoughts

I think these two events highlight just how volatile and full of unfortunate realities this space is. The Digitex event was a classic “startup problem” where a man with a vision was let down by underestimating the combination of technical development, people management and letting media hype get out of hand.

 

Tether is just a scam. Lets hope this is the last time we have to hear about it.

 

Always remain vigilant and remember that this is an unregulated industry with asymmetric risk-reward profile and loads of rent-seekers and crooks out for your money. We see massive reward opportunities in this space, however, the further away from Bitcoin and Ethereum you go, the more the asymmetry favors the risk.

 

At RSC, we want to help everyone find their edge no matter your risk profile. Keep your questions, suggestions and thoughts coming in the Discord so we can help you all nut out where the value is and how to control this risk.