Bitcoin rally is masking capital flight from crypto exchanges

[PORTLAND] Lost among the current bout of cryptocurrency euphoria is the fact that capital outflows are exceeding inflows on some of the biggest digital-asset exchanges.

While that may sound counter intuitive to the basic laws of supply and demand with prices of Bitcoin and other tokens surging, it's not that rare an occurrence in a market that has been dogged by allegations of fraud and manipulation over its decade long existence.

TokenAnalyst, a London-based provider of blockchain data, estimates that withdrawals from trading platforms including Bitfinex, BitMEX, Binance and Kraken have exceeded inflows by about US$622 million over the past 5 days.

Bitcoin's more than 30 per cent price rise since last week may have been exaggerated by capital flight from the controversial exchange Bitfinex and its affiliated stablecoin Tether in the wake of allegations that the companies that control both co-mingled client and corporate funds to hide losses.

As in past periods of turmoil, investors are seen seeking the safety of Bitcoin because it's the largest and most liquid token.

"Since Tether is insufficiently backed, it means that some of the reserves backing customer assets on exchanges are likely insufficient," John Griffin, a finance professor at University of Texas at Austin who had examined cryptocurrency market manipulation, said in an email.

"So smart customers will not custody their funds on exchanges and pull their crypto off exchanges. This could put further upward pressure on Bitcoin prices as one would rather take fake money and exchange it to Bitcoin."

Data from TokenAnalyst shows that Bitfinex had net outflows of more than US$1.7 billion of Bitcoin and Ether from the exchange since April 26, after New York's Attorney General alleged the companies engaged in a coverup. Bitfinex and Tether dispute the allegation and have classified the transfer of funds as a loan.

Bitcoin traded at a premium of as much as 6 per cent on Bitfinex compared with other crypto exchanges after the funding controversy broke, while prices of many other coins initially tumbled since Tether is widely used throughout the US$250 billion market as an intermediary in crypto trading.

The premium disappeared this week after Bifinex said it raised the equivalent of US$1 billion through an online sale of tokens.

On April 30, the companies behind Bitfinex and Tether said that the stablecoin is backed by cash and short-term securities equal to 74 percent of the outstanding coins rather than completely pegged to the US dollar. That came as a surprise to many traders, who assumed it was fully backed, and used Tether to park assets in during times of high volatility in the crypto markets.

Kasper Rasmussen, a spokesman for Bitfinex, didn't return a request for comment.

This wouldn't be the first time for Tether to impact Bitcoin prices.

Last year, Professor Griffin co-authored a paper looking at Tether's role in the 2017 boom, when Bitcoin almost touched US$20,000. The authors concluded that Tether was used to manipulate cryptocurrency prices, and that market manipulation accounted for half of the runup.

"Given that the Bitcoin market can be manipulated in such a significant way, it would not be a stretch nor surprising to find that manipulative activity is behind the recent run up when the underlying market mechanics are similar to before," Prof Griffin said.

BLOOMBERG