
Bitcoin Exchange Had Too Many Bitcoins - dsri
https://www.bloomberg.com/view/articles/2017-08-02/bitcoin-exchange-had-too-many-bitcoins
======
jstanley
Great writeup. Almost anything written by Matt Levine is worth reading.

This is a concise and accurate description of the fun that occurred with
Bitfinex's handling of the BCH fork.

At least, it's fun if you weren't involved. If you naively held BTC on
Bitfinex and were hoping to receive an equal amount of BCH you probably didn't
think it was fun. If you carefully read Bitfinex's statements and decided to
take advantage of their policy to acquire risk-free BCH, you probably think
it's even less fun. But for the rest of us, it's fun.

~~~
panarky
Matt sums it up well in a footnote:

    
    
      Imagine if I announced tomorrow that I had created a new blockchain,
      called Bitcoin Matt, and that everyone who owned a BTC today
      will tomorrow own both a BTC and a BCM.
    
      Fine, great, you all own BCMs, congratulations. But also anyone
      short a BTC today will be short a BCM tomorrow, and will be
      forced to go buy in those BCM shorts.
    
      Even with no economic support for BCM -- with nobody mining
      it, or using it, or treating it as a store of value -- I have
      magically created demand for it, just because BTC short-sellers
      will be forced to buy it in to cover their shorts.
    
      And if no one else is using it, then it will trade very thinly,
      and it will be very expensive to cover. (And anyone who does sell
      it will make a lot of free money.) Nothing stops me from just
      announcing that I've cloned a copy of the bitcoin blockchain
      for BCM; the only way to avoid this abuse is for people to ignore
      it -- and that means not forcing short sellers to cover it.

~~~
tpallarino
Except your clone doesn't have miner support, community support, and get
listed by major exchanges. I hate that people are acting like anyone can just
go and make a fork for free money.

~~~
jmah
The point is, what's the threshold for "enough support"? Already for Bitcoin
Cash, different exchanges have come to different conclusions on whether it's
sufficiently supported to list on their exchange.

~~~
tpallarino
There is no threshold, it's clearly a gradient. Some exchanges want to list
it, others don't. Certain exchanges listing it gives it more value than
others, and if it's impossible to trade/spend, then the coin has 0 value.

------
cwkoss
Bit tangential, but I read an interesting theory this morning:

Because there is greatly reduced liquidity of BCH (most exchanges don't
support, hard/slow to deposit into exchanges that do), supply of BCH is
artificially limited at the moment. Proponents of BCH can trade their BTC for
BCH at a rate greater than they believe it is worth to easily pump the value
and 'market cap' (most market cap stats have no measure of this 'locked
supply') to make BCH appear more popular than it is at a fraction of the price
that would be necessary if selling was easy. This could sway more miners to
choose to mine BCH over BTC, and in doing so, actually increase the real value
of BCH.

From:
[https://www.reddit.com/r/btc/comments/6ooorn/small_blockers_...](https://www.reddit.com/r/btc/comments/6ooorn/small_blockers_are_segshitting_their_pants_over/dkj9mex/)

~~~
tpallarino
Yes. Price and market cap mean nothing when there is not sufficient liquidity.
There was literally a 60% price spread between exchanges yesterday because
arbitraging is incredibly difficult/impossible.

~~~
runeks
If arbitraging is impossible, can we really call it a single market? If I
can’t seek exchange A’s BCH on exchange B, and vice versa, aren’t we actually
dealing with two instruments, rather than one? Looks to me like multiple
different BCH IOU markets currently exist: one for each exchange.

This really has nothing to do with the Bitcoin Cash blockchain, since there’s
no connection between it and the tickers on the exchanges (you can’t convert
one to the other).

An analogy would be ten different commodity exchanges who all trade “steel”
instruments, but neither allow you to either sell “steel” instruments and
receive actual steel, or deposit actual steel and receive “steel” instruments.
In this case, can we really say these exchanges are trading steel? Why would
their steel prices ever reflect the actual price of steel, when the two
markets are not connected in any way?

------
gregschlom
"There is no single obviously correct solution to these issues. Instead, each
decision was sort of weird and contingent and reversible: not the immutable
code of the blockchain, but just humans sitting around and trying to figure
out which approach would cause the fewest complaints. In that, it's a bit like
the Dole settlement process -- only instead of a neutral judge making
decisions based on written contracts and established precedent, it's the
people running each exchange making their own judgment calls."

This is what I'm always repeating about blockchains: they're very valuable _if
and only if_ you cannot use the protection of contracts and laws when making a
transation - for example because you're doing something illegal. In Every.
Other. Case. systems based on trust, contracts and law (such as the banking
system for example) are more efficient.

It doesn't mean that there isn't room for improving existing systems, just
this is probably best done with regular servers and databases rather than a
blockchain.

~~~
goodplay
>they're very valuable if and only if you cannot use the protection [..]

I don't think that's entirely fair. They're also valuable to those who want to
transfer money without ridiculous fees, excessive bureaucratic friction, and
many mandatory middlemen.

What other system would allow you to instantly be able to accept payments
without giving an exorbitant portion of your revenue?

~~~
slg
But the "ridiculous fees, excessive bureaucratic friction, and many mandatory
middlemen" are what buy you the protection. The fees from necessary middleman
seem ridiculous when nothing goes wrong, but that is how Visa pays for a
chargebacks or fraud protection. The governments bureaucratic friction might
seem excessive, but that is how they ensure people are paying their taxes
which goes to fund the court systems that help mediate disputed contracts.

~~~
phlo
Regulation can greatly improve things.

Within the Single Euro Payments Area, credit transfers (i.e. bank transfers)
have been free for almost a decade and will be instant (<10s), effective
November of this year. Another regulation, Payment Services Directive 2 will
bring more open access to bank accounts as well, requiring banks to provide
access to APIs.

Relatedly, the EU also limits interchange fees for credit and debit cards (to
0.2 and 0.3%, respectively). This is the reason why integrators like Stripe
charge 1.4% for European and 2.9% for non-European cards.

Payments can be quick, simple and cheap. All you need is some competition, or
regulation to favour end-users' interests.

~~~
mcherm
Yes, but that comes at a price. It means that banks and financial institutions
cannot make the same level of outrageous profits -- or at least not without
finding different income streams.

------
NelsonMinar
It is hilarious watching people try to reinvent financial institutions without
any knowledge of or respect for history.

~~~
Twisell
Maybe I'm too "left wing", but if you ask me short selling, complex products
and high frequency trading are among technological "improvements" that have
led actual stock exchange to an ugly mess where biggest profits are made by
"scamming" efficiently other users. Should regulators forbid (or tax more)
some (or all) of this mechanisms markets will quickly resume to what they
should be, places for people to invest money on companies that produce value.

So yeah pretty impressive to see that currencies based on unicorn blockchains
of the future jump right into the old bandwagon of making up complex financial
instruments that few people really understand on top of an experimental core
concept.

~~~
gnaritas
I'd say you don't really understand what you're critiquing; you think those
things are bad because you heard they were, from someone else who likely
doesn't understand it either. There's absolutely nothing wrong with short
selling or high frequency trading. Short sellers help keep prices fair and
companies honest, HFT makes trading cheaper for everyone.

The markets are _worse_ without them, the market was worse before HFT which is
the only thing new here, trades used to cost way more due to wall street
middle men taking a big cut of every trade, far far bigger than HFT's take
now. The only people who have a logically valid reason to hate HFT are the old
school manual traders who were displaced by them and can no long make a living
trading _chart patterns_. As late as the 70's and 80's there were people
getting rich with strategies as stupid simple as buy the 10 day high and sell
the 10 day low. Those people hate HFT, it took away their cash cow.

HFT is a sign of a healthy free market, better traders came in and offered to
take your trades for far less money than the manual traders could, and took
over; that's healthy competition, and they competed with each other driving
the prices lower and lower until they hit the penny. Now they all fight over
that penny to see who can be fastest because congress won't let them compete
on price anymore (the sub penny rule) so they compete on speed instead.

~~~
pdkl95
> I'd say you don't really understand what you're critiquing

I'd say that you are assuming that optimizing for price is good, and
presupposing how a market should be judged. Cheaper is good when it represents
new innovation, less energy waste, and similar improvements. Cheaper can also
mean cuts to wages and jobs, or a reduction in quality.

> There's absolutely nothing wrong with short selling

Leverage can be used for good, and sometimes it's used irresponsibly. As this
thread's article demonstrates, short selling also creates systemic risk.

> trades used to cost way more due to wall street middle men taking a big cut
> of every trade

Eliminating middlemen and/or reducing transaction overhead costs do not
require high frequency. You're seeing effects of technological improvements
and better regulations. The same improvements also benefit "slow" trading.

> chart patterns

> getting rich with strategies as stupid simple as buy the 10 day high and
> sell the 10 day low

"Buy low, sell high." is the foundation of any successful trading strategy.
HFT (when successful) is literally the same thing at much shorter time scales
and improved heuristics. Machine learning can probably provide more detailed
at a much finer-grain than a simple 10 day sliding window. Again, this does
not require high speed.

> HFT is a sign of a healthy free market

It tells you little about the health of the market; HFT is a sign of a market
uses short-term transaction ordering heavily when reconciling trades. It's
entirely possible to have a healthy market batched trades that all execute at
the same unified price.

~~~
rsync
"Leverage can be used for good, and sometimes it's used irresponsibly. As this
thread's article demonstrates, short selling also creates systemic risk."

What critics of short selling are often unaware of is the role that short
holdings play in dampening a market crash.

The act of unwinding your short position involves _buying the stock_ which
means that for every tick downward in stock price there is new upward pressure
on the price as buyers step in to cover their short position.

Were these constant, ready buyers not extant, market downturns can turn into
precipitous crashes very quickly.

~~~
pdkl95
I should have used more specific language; I'm not trying to argue that short
selling is "bad". The benefits - such as dampening a crashing market - are
large enough to accommodate some risk. I'm primarily addressing the claim
that, "There's absolutely nothing wrong with short selling". Ignoring small,
acceptable risks is normalizing deviance[1].

[1]
[https://www.youtube.com/watch?v=PGLYEDpNu60](https://www.youtube.com/watch?v=PGLYEDpNu60)

------
matt_wulfeck
> _But BTC hasn 't really lost any value since the spinoff, still trading at
> about $2,700. So just before the spinoff, if you had a bitcoin, you had a
> bitcoin worth about $2,700. Now, you have a BTC worth about $2,700, and also
> a BCH worth as much as $700. It's weird free money, if you owned bitcoins
> yesterday._

Doesn't this throw up any red-flags to the btc/crypto apologist? This type of
behavior is not how healthy markets work.

~~~
spectrum1234
The market expected BTC to fall by about as much as BCH increased. It did not.
The market was wrong by about ~25%. At least in that moment.

~~~
icebraining
_The market expected BTC to fall by about as much as BCH increased._

How can that be measured?

------
jandrese
I really don't see how this fork is going to go down as anything other than a
boondoggle. Right now the value of BCC is being propped up by having almost no
way to actually sell it, but once an actual market opens I fully expect its
price to crash hard.

~~~
thefalcon
This line of argument makes little sense. In the markets that do offer a way
to buy and sell it, there's still a market setting the price. This idea that
there will be totally different market forces at work once more people have
access to the market is silly. I would not buy a $400 BCH today if I wasn't
also willing to buy a $400 BCH when transaction volume is 1000x what it is
now. If anything the fact that there's not an insane selling frenzy from those
"lucky enough" to have access to their BCH on an exchange shows that there's a
real demand for BCH as a currency.

There seems to be a lot of propaganda out there trying to marginalize and
minimize Bitcoin Cash. The belief that literally everyone will instantly sell
their BCH as soon as they can seems to be one of the messages of that
propaganda rather than a reflection of reality.

~~~
makomk
People who want to buy BCH have relatively unrestricted access to the market
since most of the exchanges have reopened BTC deposits. (Of course, whether
they can withdraw that BCH is another story entirely.) Most people who want to
sell do not have access since BCH deposits are either not available or require
multiple days worth of confirmations. Can you see the problem here?

~~~
thefalcon
You're saying that people buying BCH right now aren't aware that there's a
huge glut of supply waiting to flood the market, and aren't taking this into
account in their buying decisions?

There is no need for anyone to have BCH in hand today, no reason for someone
to value a BCH today more than a BCH in a week. If they thought that thousands
of people selling BCH once they are able will lead to a drop in price, they
would just buy at the lower price.

~~~
cwkoss
I think the average cryptocurrency trader is much lower-information than you
are estimating.

There are hundreds of rubes who see "Bitcoin Cash" and think that because it
suddenly jumped to the 3rd largest cryptocurrency by market cap, lots of
people are talking about it, and its cheaper than Bitcoin, _this_ could be
their chance to get the elusive short-term 3x+ crypto ROI. Many of these
people have no concept of the locked supply.

I'd estimate that roughly 1/4 of buyers are informed BCH proponents, the other
3/4 are low-information get-rich-quick hopeful speculators.

~~~
makomk
Pretty much. BCH bulls who find out about the supply issue have been assuming
that it can't be that much of a big problem, that most people who wanted to
sell must've done so by now anyway, and of course there's no way to tell how
much supply is actually locked up. BCH bears are mostly irrelevant to the
price since, unless they expected it to be worth enough to justify locking
their BTC in less reputable exchanges during the fork, they can't actually
sell yet. Anyone who isn't following the online discussions closely probably
simply doesn't know about this - the news articles I've seen haven't mentioned
that issue, and it took many hours for this information to even percolate
through the discussions. Claims like "3rd largest cryptocurrency by market
cap" have been a lot more prominent everywhere. (Also, if you want an idea of
what BCH supporters are thinking right now, the front page r/btc is currently
a good place to look.)

~~~
homero
There's thousands of people like me checking every minute if we can deposit
bch to sell. There's millions waiting and I'm hoping to be the first.

------
colinbartlett
I always really enjoy Matt Levine's columns in Bloomberg. Very detailed and
technical but always very carefully explained and readable.

~~~
curiousgal
You're probably subscribed to his newsletter then, it's the only newsletter in
my inbox.

~~~
thefalcon
Good call. I've only ever read this and, interestingly, the semi-related Dole
article, but they were both superb. Subscribed.

~~~
tanderson92
Don't miss out on the incredible "Arbitrage Discovered", one of the best
things he has ever written:
[https://www.bloomberg.com/view/articles/2015-02-27/arbitrage...](https://www.bloomberg.com/view/articles/2015-02-27/arbitrage-
discovered)

~~~
rspeer
I want to hear the epilogue to that story, but disappointingly the story seems
to have gone quiet since it was reported.

Is Max-Hervé George still making 68% ROI per year at Aviva's expense? Did
Aviva weasel out of it? Did they pay him off at a level he deemed acceptable?
Did they go with the economical alternative of hiring a hit-man?

------
runeks
> To use an imperfect analogy from corporate finance, you could think of the
> fork as a spinoff. For most of PayPal’s life, it was owned by eBay. Holders
> of the EBAY ticker owned the parent company eBay, which encompassed eBay
> proper as well as PayPal. On the day of the spinoff, eBay stockholders
> received, for each EBAY share they owned, one PYPL share. At the same time,
> they got to keep their existing EBAY shares.

This is a misleading analogy, because EBAY holders can only be granted PYPL
shared because EBAY _owned_ PYPL. So unless BCH was an existing entity before
the fork, which was covered under BTC already, this analogy doesn’t capture
what happened here.

We’re not talking about companies, were talking about distributed databases.
Databases contain information, and can be copied, as opposed to a company. A
better analogy would be someone scraping Twitter, making a copy called Twooter
with all past tweets from Twitter, and then forking off from there with their
own “twoots”. In other words: it’s a copy, not a stock split.

------
notlikethis1994
Yeah if you were paying attention to the short vs long interest for BTC on
Bitfinex right before the hard fork, BTC shorts went up like crazy and
everyone thought ppl were hyper bearish on BCH. It was actually because ppl
were pulling this funny business to get free BCH from Bitfinex.

~~~
tpallarino
Hedging against a clearly inflated asset is "funny business"?

~~~
zwily
The funny business is that people were creating a position guaranteed to pay
out free money, assuming bitfinex actually followed their own policy.

~~~
tpallarino
That's not true, I performed calculations beforehand to decide whether it was
more profitable to hold BTC in the margin wallet as opposed to other assets
(which I knew would rise after the fork). The core question is whether
altcoins would rise more than the price ratio of BCH/BTC. Alts went up 20%
while BCH/BTC is ~0.15, meaning you were better off skipping the BCH
altogether and just holding alts. The tradeoff is the increased risk.

------
numbsafari
This would have been so much more fun if the contracts were all smart
contracts using Ethereum.

~~~
zodiac
How would you set up a btc lending (for shorts) contact with eth?

~~~
jeeceebees
If you created a 2-way pegged bitcoin ERC20 token, you could use something
like EthLend.

------
Legogris
Excuse my ignorance, but this seems like the obvious solution to me:
Distribute 1 BCH to each (actual) BTC holder on the exchange, completely
ignore margin orders. So shorts don't owe and also longs aren't credited BCH.

Fair and no way to game. Why aren't exchanges doing this?

~~~
tomerv
There's no such thing as "actual" BTC holder. All the BTCs in the exchange are
fungible. A holder of BTC doesn't know if that BTC was loaned to someone else
or not.

In a sense, what you suggest is exactly what the exchange did: They calculated
the number of "actual" BTCs in the exchange, and split the appropriate number
of BCHs evenly among everyone.

------
tobyhinloopen
So I had some bitcoins at time of the fork. Do I have the other new coins as
well? How can I spend, sell or buy them? Is there a multibit for bitcoin cash?

~~~
gressquel
did you have it on a wallet online or in a wallet you created with a software
locally? if its locally created, then good news. you should download Electron
Cash and import the existing wallet and you shall see your BCCs.

~~~
vinhboy
Should I sell my BCC so I can collect the cash in case it fails? And then
assume I will still have my BTC..

~~~
vkou
If you don't want to own BCC, and you don't expect it to rise in price, you
should sell it.

The same can be said for everything you own.

------
pishpash
So what's the explanation for the combined coins shooting up in value (if only
for a little bit)?

~~~
tpallarino
BCH has no liquidity. It's price is largely irrelevant now. You can't just
look at market caps.

~~~
elif
That is only true if the market is unable to recognize it and price coins
accordingly. Maybe the market is purely irrational, but it's certainly not a
given.

I won't claim to know any more than you, mostly because ~80% of bitcoin use is
in Asia and i know little about it. All of China and Japan and 2/3 of korean
exchanges offer withdrawals or trading of BCH.

------
mannykannot
There are shades of the 'what happens to my self if I could be teleported
without the destruction of the original me?' philosophical conundrum.

------
skywhopper
Good article. A blockchain can only protect systems that it encodes directly.
And for the simple cash transactions that's easy enough. But humans can, have,
and will devise all sorts of derivative financial instruments to amplify the
utility of assets, and no mathematical system can encode all the arbitrary
possibilities that implies into their structure beforehand.

Instead, we're back where we started where legalities and regulations matter
and the reliability of your durable ledger is limited to the transactions it
actually captures.

------
stordoff
This is veering off-topic, but is anyone else finding the Bloomberg menu
nearly impossible to use/borderline broken? It activates on hover, but to
actually click on a story you have to get past a secondary list of categories
that also acts on hover (hiding the story you intended to click on). If you
move the mouse diagonally instead, chances are you'll activate a different
top-level menu. I felt like I had to dodge around menu elements just to be
able to click on anything.

------
perfunctory
> The way short selling works is that X borrows a share from Y and sells it to
> Z. So Y owns one share, and Z owns one share, and X owes one share, and
> everything balances out and there's only one share outstanding.

Is that really true? That would mean that both Y and Z should get dividend
payment, which doesn't make sense. I always assumed that when X borrows one
share from Y, the Y does not own that share any more.

~~~
perfunctory
@kgwgk well, the company obviously doesn't want to pay the dividend twice. So
indeed they will only pay to Z. If X pays Y I presume that's just the terms of
the lending agreement.

> What doesn't make sense is for both Y and Z to vote, for example.

Very good point. But it just confirms that it makes no sense to say that Y
still owns a share.

------
ohiovr
The article seemed to indicate a short squeeze condition without actually
naming it that way, strangely enough. If so, it could get vicious for the
short sellers. I am not invested in it, just thought to add my 2 cents

------
chaoticmass
Seems to me the problem is with the exchanges, not the bitcoin.

------
tpallarino
From the BCH Token Distribution Announcement:

All BTC wallet balances will receive BCH

They did not issue another post saying that this would not be the case and
broke their distribution terms. Regardless of whether it was "free money" (it
wasn't if you consider opportunity cost), they did not respect this simple and
clear statement from their terms.

[https://www.bitfinex.com/posts/212](https://www.bitfinex.com/posts/212)

------
smaili
Here's what people tried to pull off:

1\. Set up an account, borrow one bitcoin, sell it short, collect $2,700.

2\. Set up another account, buy a bitcoin, spend $2,700.

3\. When the fork happens, your long account ends up with +1 BTC and +0.8 BCH.

4\. Your short account ends up with -1 BTC and -0 BCH (because Bitfinex
doesn't require you to come up with the BCH).

5\. Net, you have $0, 0 BTC and 0.8 BCH.

6\. The 0.8 BCH were worth as much as $560.

7\. That money was totally free.

~~~
tpallarino
Disclosure: Bitfinex robbed me of BCH according to the terms of the agreement,
which was not amended until after the fact.

The money wasn't totally free. There was a huge opportunity cost to holding
BTC at that time, and even having any in the margin wallet was a huge
liability as opposed to funding your margin account with altcoins. Any serious
trader knew that alts would rise immediately following the fork and Bitcoin
would drop.

And regardless of whether it was free, their terms explicitly stated that
those with a BTC balance in their wallets would receive BCH [1]. They did not
issue a follow up post clarifying that hedging was strictly not allowed and
thus robbed people. After how they handled both this and their hack, I
urge/beg people not to use this exchange.

[1] [https://www.bitfinex.com/posts/212](https://www.bitfinex.com/posts/212)

~~~
harryh
1\. Try to make free money in a totally unregulated market when an
organization publishes a foolish policy.

2\. Get mad when said organization amends policy so you can't get your free
money.

If you're gonna try to profit in the wild west it looks kind of _unseemly_ to
get mad when your scheme doesn't go off quite as easily as you had hoped.

~~~
tpallarino
1\. Organization implements foolish policy

2\. Thousands of people make trades according to foolish policy

3\. Organization changes terms of foolish policy, telling nobody.

4\. Organization then waits until after the fact to tell everyone that they
have changed the policy, which dictate d the actions of a non trivial
percentage of their customers.

If you're going to try to look like a legitimate exchange, this kind of thing
looks pretty unseemly.

~~~
harryh
_If you 're going to try to look like a legitimate exchange, this kind of
thing looks pretty unseemly._

Oh I agree! The whole thing has bitfinex looking a little foolish. It was step
#1 that was the problem though. Steps 3 and 4 were them fixing it as best they
could. Those parts weren't mistakes, it's just them keeping you from stealing
Bitcoin Cash from their other customers.

~~~
tpallarino
I don't really see how it's stealing from their other customers when anyone
with a nonzero BTC balance could have shorted BTC with BTC in their margin
account.

Somehow I'm penalized for trying to maximize my profit based on the terms that
were stated, even though that's what every single other person on the exchange
is doing. Basically they chose to favor those who didn't understand the terms
or what was going on in favor of those who did.

~~~
harryh
A bunch of people did what you did. That (before their correction that has you
so riled up) lowered the coefficient used to distribute BCH from 0.8539 to
0.7757.

The BCH you attempted to acquire for no cost would have come from other
customers in the form of that smaller coefficient.

------
philanthropist
Finex may have played this badly, but it was clearly stated in their statement
on how they were handling the fork. If you didn't like their approach, all you
had to do was move your coins off the exchange and split them yourself. It
wasn't (too) difficult to do, and I say that as someone who isn't really
technical, but can follow simple instructions.

