Bitfinex is now trading at a significant premium from other western exchanges with such huge gaps usually not seen for more than a few hours due to the considerable arbitrage opportunities it offers.
One bitcoin is currently trading at around $1,320 at Bitfinex, while on Coinbase and Bitstamp, bitcoin’s price is at around $1,250, near its all-time high.
The last time such gaps were seen for a lengthy period was shortly before MT Gox announced bankruptcy in 2014. Then, the exchange was trading at a premium of around $200 as traders could not deposit or withdraw fiat currency.
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Bitfinex recently announced they have been blocked out of the banking system, unable to accept deposits or process withdrawals in fiat currencies. The only way out is by buying bitcoin and sending the currency to a cold wallet or to other exchanges.
Some are suggesting arbitrage opportunities, which might explain the recent overall rise of bitcoin’s price in all exchanges. However, the buying pressure on Bitfinex appears significant, thus the exchange continues to retain a considerable premium.
If the exchange can account for all of its customers’ bitcoins and other digital currencies, then it should be able to process all bitcoin withdrawals, but they were hacked last year out of some 120,000 bitcoins. Therefore, it is not very clear just how many bitcoins they contain in their cold wallets, nor is it clear how these cold wallets are stored.
The situation appears very similar to MT Gox, the then biggest bitcoin exchange. They were cut-off from the banking system, leading to a premium of some $200. Eventually, they were unable to process bitcoin withdrawals as the exchange was seemingly running on fractional reserves.
Users began complaining about bitcoin withdrawal delays from MT Gox around December 2013, with the complaints getting much louder in January and then February, when the exchange announced they were insolvent.
There have been no such complaints regarding Bitfinex as far as we are aware, but if they start being raised it might be too late. Many, therefore, seem to be getting out, explaining the price premium.
The lesson here for other exchanges is that they need to be regulated as otherwise they may be suddenly cut off the banking system which would in effect make them as good as inoperational due to lack of liquidity.