A Spoonful Of Sugar

A spoonful of sugar helps the medicine go down.

Last week, Bitfinex depositors received a toxic medical cocktail in the form of a 36% haircut. To make the situation more palatable, Bitfinex dispensed sugar – in the form of a “BFX Token”. Each Token is essentially an infinite-term $1 IOU.

In the Terms and Conditions of the BFX Token, Bitfinex explicitly stated that it has no legal obligation to redeem the token at par, pay dividends, or convert into Bitfinex equity. Bitfinex also did not provide any financial statements, or provide any further clarity on how the 36% haircut was calculated.

The only information we do have came from a TeamSpeak interview that Chief Strategy Officer Phil Potter provided. He said that Bitfinex “reserved” (an interesting word choice; what’s a few million USD between friends) 10% of the allotment of BFX tokens to cover potential lawsuits and other operational expenses.

Approximately 72 million BFX tokens were issued. According to Phil, Bitfinex kept $7.2 million under its control. Was this $7.2 million of customer funds, or was this $7.2 million of Bitfinex retained earnings that was not subject to the tax? We don’t know for sure. Zane Tackett, Bitfinex’s social media manager, claims it is simply retained free cash. But why should Bitfinex keep the profits and their customers take the loss?

Senior management at Bitfinex confirmed that not everyone received a haircut, or the haircut was deeper than it would have otherwise been because they “reserved” customer or company cash so they could continue operations.

Many have compared this favorably to a bankruptcy proceeding. Yes, in a bankruptcy proceeding, courts allow companies to use cash on hand to continue operations. Crucially, before such an allowance is made, the court has full knowledge of the financial position of the company via audited financial statements.

Bitfinex has not released any information about their financial health, audited or otherwise. Failing to provide this information to its creditors further fuels speculation of nefarious activities occurring at Bitfinex. Given the global spotlight on them and the broader Bitcoin industry, silence is not doing them or the community any favours.

Bitfinex crammed BFX tokens down the throats of its creditors, and allowed the shiny new bauble to trade. This is a classic PR move; block, deflect, and distract.

The BFX market opened at 10% (I will quote all prices as a % of par, par value is $1), and now stands at 40%. Regardless of what you believe to be the intrinsic value of the token, there are those willing to buy and sell BFX on the open market. How should a trader value BFX tokens, and what are some possible trades?