BFX Valuation: Corporate Buy-Back

Corporations routinely issue equity and debt in the primary market; if subsequently the equity or debt trades low enough on the secondary market, corporates will buy-back these securities.

If Bitfinex is ever able to repay BFX holders par or a fraction of par, it would be a PR win. Yet, said win would be very expensive. Bitfinex will need $64.8 million of retained earnings to pay back holders in full. That could take years or even over a decade depending on your assumptions of Bitfinex’s future earnings.

Humans have short financial memories. Eight years after the worst financial crisis since the Great Depression, subprime mortgages and auto loans are back with a vengeance. Yield-starved investors can’t get enough. If Bitfinex wants to receive the greatest return from paying back token holders, they need to pay them back sooner rather than later.

The fastest and cheapest way to retire the BFX token liability is to purchase the tokens on the open market at a fraction of face value.

The following table lists the cost of buying back BFX tokens.

This illustrates how financially attractive it is to buy back the debt at a discount to par.

Any competent CFO would advocate attempting to retire the debt at a discount. Bitfinex CSO, Phil Potter, stated that Bitfinex would not be participating in the secondary market. Yet, they would be unwise not to.

Some traders believe it ethically wrong for Bitfinex to buy its own debt. Companies buy back their debt all the time. However, in the public markets, companies must produce audited financial results. Debt holders and the management then share similar information. Each party can make informed trading decision. As it stands only Bitfinex management can make an informed decision about the future likelihood of repayment. This information asymmetry is the source of contention.

Does Bitfinex have the cash on hand to pay for its BFX purchases? We don’t know. Bitfinex provided no details about their financial position. We know that they disadvantaged creditors to reserve cash for operations. They may have more cash on hand than $7.2 million. Furthermore Bitfinex earns revenue each day – perversely, even on BFX Token trading. A portion of that could be used to continuously purchase tokens.

Under these assumptions, BFX Tokens resemble a binary option: either they will be worth 0 or par in the future. As an individual investor, does it make sense to get involved? The below table shows the risk / return ratio for going long BFX Future Contract. I assume that BFX is either worth par or 0 by the expiry date.

The risk / return is generally asymmetric. This is an attractive trade. Using leveraged BitMEX BFX futures contracts where your loss is limited by the initial margin, this trade becomes even more attractive as your downside is capped.