We talked with our CEO Gavin Smith and he weighs in on the state of the cryptocurrency market.
Why are we experiencing a Crypto-rally at the moment?
The market was due for a rally and this is a positive sign. Taking a step back – we are not expecting this to be a straight line up. It is likely to be more volatile with wide swings rather than what happened in 2017, where we saw a steady march upwards.
The catalyst for this particular rally is the upcoming halving of the mining reward. This happens every few years where the market rallies in anticipation that when there are half the number of bitcoins being mined for each 10 minute block, that means there are less bitcoin being released into the market and the price will rise in anticipation of a short supply.
Less of something, or a perceived scarcity and prices rise. Whether other factors come into play to continue the upwards trajectory remains to be seen.
Why is there a widening spread between prices on different exchanges?
Right now, spreads are widening between Bitfinex and other exchanges. This is an indication of stress in the market. As a matter fact, the Active Treasury Management Service models take this as an indicator of stress in the overall system.
In this particular situation it’s because of the investigation of tether concerning the co-mingling of tether assets with Bitfinex assets. So people with accounts on Bitfinex are nervous about their ability to withdraw fiat from the exchange. So what they are doing is converting to bitcoin and transferring bitcoins to other exchanges. Then converting those bitcoins on the other exchange to fiat and withdrawing fiat from those exchanges. This is causing the price of bitcoin to go up on Bitfinex and down on the exchanges where the conversion and withdrawal to fiat is happening.
Do you ever see this in the conventional markets?
In the conventional trading world an example of this type of stress would be the LIBOR market during the 2008 financial crisis. The theoretical LIBOR price was 12- 13%, but different banks were quoting wildly different LIBOR prices. Some were quoting closer to the Interbank rate of 2 – 3 %, some were up in the 30 – 40%. That was because people had absolutely no confidence in the solvency of certain banks. Those banks had to pay much more to get access to funds. So even though LIBOR is meant to be a very tight market, and it usually is. However, when there is stress in the system that will cause a widening of spreads between the institutions that are perceived to be solvent and those that are perceived to be a risk.
This is all very odd that the US regulators are attempting to investigate Bitfinex, because they do not have US customers, they don’t have a presence in the US. Don’t do business there at all. It’s another example of the US thinking they have the right to regulate globally.