Bitfinex is currently trading at over $150 discount to GDAX:

Bitfinex price trading well below other BTC/USD exchanges

More curiously, just last month they were trading at a 10% premium to other exchanges. So why the drastic change over the course of a month?

In the revelations last month of Bitfinex having trouble with its banking partners in Taiwan, many customers were concerned about being able to get fiat off the exchange. Basically, USD gateways to Bitfinex were closed off except for three ways:

Taiwanese domestic transfers were still flowing to and from Bitfinex’s TW accounts. USD Tether was still flowing because Tether also has Taiwanese banks, so USD flow between Tether and Bitfinex have been uninterrupted, and Bitfinex has been honouring the conversion 1:1 for customers. Attorney escrow arrangements for one-time withdrawals (this was introduced this month, in May)

Initially, this led market participants to bid up the Crypto/USD pairs (ETH/USD, BTC/USD, etc) in order to be able to withdraw funds from Bitfinex. People scared about solvency risk or who merely preferred to have access to the funds now rather than later, were willing to overpay for crypto on Bitfinex relative to other exchanges, just to get out:

Premium in BTC/USD price in Bitfinex vs. Stamp vs OKCoin USD

It also led to some interesting price action on the USDT/USD pair which trades at Kraken:

Kraken’s USDT/USD trading pair

If you had a USD balance on Bitfinex, you can convert that into USDT (if you’re verified) and withdraw that USDT token out to Poloniex or Kraken and trade however you want. Because so many people were already buying crypto into 8–10% premiums, people chose to sell USDT at a discount for dollars instead, as their preferred way of getting out of Bitfinex USD / USDT.

Additionally, Tether holders who were concerned about the integrity of the dollar backing of the USDT tokens were willing to sell USDT for under $1, as low as $0.89, in order to access dollars faster.

Broadly, this is a reflection of two things:

Liquidity premium where the trader values having the USD now versus waiting for banking issues to resolve and getting it later (simple time value of money). A risk premium on whether Tether funds get seized or other complications arise where the dollars aren’t backing USDT properly

Bitfinex: From Premium to Discount

For weeks these dynamics outlined above led to crypto pairs on Bitfinex trading at a premium and USDT trading below the dollar. However, after the recent attorney escrow arrangements were announced to start rolling out, the premium in Bitfinex has really dropped. In fact, it dipped into a discount this week:

Bitfinex descending into discount this past week

This is a reflection of:

All the panic-buying demand had exhausted itself in the first weeks, so much of the jittery USD money had already gone. Also, crypto prices in general have gone up, leading to a lower Crypto Value : USD ratio in Bitfinex as new USD struggles to enter through domestic TW banks. The rest of the “I want my fiat out of Bitfinex _now_” crowd, has now exited through the attorney escrow arrangement, taking USD out of Bitfinex’s ecosystem. The dearth of USD on the exchange from 1) and 2) has resulted in:

a) Less USD buying power and thus reduced demand for the Crypto/USD pairs on Bitfinex, and thus a discount on Bitfinex crypto pairs versus other exchanges.

b) A boost in USD lending rates for margin traders, since less USD on the exchange means more people have to borrow to trade.

The above factors (a) and (b) incentive people to sell BTC, ETH, LTC, XMR on Bitfinex in order to get USD on the exchange to earn USD rates and to take advantage of deeper discounts in crypto pairs themselves.

4. Additionally, with the depressed Crypto prices on Bitfinex, it even incentivizes people to overpay for USDT on Kraken in order to access USD for buying the discounts and arbitraging from Bitfinex.

Bitfinex right now is trading at 9% below GDAX, for example. And there are no frictions to withdrawing crypto from Bitfinex. So it is economical to overpay for USDT on Kraken even 5%, so that you can get USDT into Bitfinex for a USD balance 1:1, and then buy 9% discount, send it to GDAX and pocket 4% difference.

Also, don’t underestimate 3(b) above. The USD lending rates right now are 0.4–0.5% per day. This is over 100% APY, a rate considered usurious in a number of jurisdictions!

Traders then are balancing the discounted crypto pairs on Bitfinex and this USD rate they can lend out at. Because if you have no TW domestic account or special arrangements with Bitfinex to get USD deposited, you can only send USDT or crypto (BTC, ETH, XMR, LTC) to sell and access USD on the exchange. Some are hungry enough for that USD swap yield that they are willing to send crypto to Bitfinex and sell well below market price on other exchanges just to access USD balance to earn these high margin funding rates.

One final point is that Bitfinex has anonymous, unverified accounts. Which means you can make a totally undocumented account, send as much BTC or ETH as you want to it, and sell into USD. They don’t require a burdensome KYC/AML process like Gemini, BitStamp, GDAX, etc. This ease of depositing crypto and selling (for privacy-conscious people who want to hedge downside risk) makes for even more selling pressure relative to other BTC/USD exchanges.

Conclusion

All of the imbalances discussed above have been a result of USD frictions into Bitfinex. It has been a chain reaction resulting from the initial freeze to the various gradual withdrawal options.

Since Bitfinex’s banking problems, there has been a rollercoaster of a market reaction, starting with Bitfinex crypto pairs trading at a premium reflecting liquidity preferences of those who could not pull USD out. The attorney-escrow arrangement and USDT withdrawals has also led to USD exiting the Bitfinex ecosystem, causing a shortage of USD.

This USD shortage has led to reduced demand for crypto on Bitfinex, and USD holders are splitting their efforts between lending USD for margin traders to buy crypto, or buying the crypto themselves to send to other exchanges for arbitrage opportunity.

Finally, the higher USD rates incentivize traders of particular risk appetite to sell crypto at a discount in order to earn 0.4–0.5% on US dollars per day (while avoiding crypto exposure). This increases discount pressure on crypto pairs.

For anyone who is able to get fiat onto Bitfinex, ideally through TW domestic bank account (so it’s 1:1 USD) has a number of arbitrage opportunities to take advantage of.

These deep discounts are unlikely to last longer than the next week, as Bitfinex is testing new onramps for fiat, which would lead to a flood of interest to buy cheap crypto and lend at attractive USD rates.

As soon as Bitfinex conclusively addresses the USD flow issues, the crypto pair prices will normalize with other exchanges that don’t have banking frictions and USDT price will return to par.