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How Bitfinex Leverage Operates
Leverage mainly comes in two different forms in financial markets: margin and derivatives (such as futures). Bitfinex operates on the former: Margin.
In the futures market, for every short there must be a long and vice-versa; we won’t get into the details here. Margin however is different: USD or the underlying asset (here ETH) is “borrowed” from other users whom are lending it and that is how the leverage is created. This type of leverage is capped at 5x only. Of course, as the assets are borrowed, the person on margin must make regular interest payments.
As margin is different from leverage on futures we can actually see the amount of BTC/ETH/XRP that’s long or short at any point in time on Bitfinex; a metric we’ll be using.
The issue with leverages is it accentuates market movement, however this is not necessarily applicable for those with enough experience with order execution. Let’s dive deep into the 1,000,000+ ETH long from the pico-bottom of ETH.
The Mega ETH Long
Most of you reading this remember the horrific market crash of March 12 2020: Black Thursday. In hindsight it very easy to say that it was an omega buying opportunity, but let’s look at someone that went in VERY big that day: The Bitfinex Whale.
Let’s wind the clocks back to 2019, ETH had topped out in June and began a downtrend. During that downtrend someone was continuously adding to their long ETH position on Bitfinex to the tune of approximately 250,000ETH.
This of course could have been a multitude of people rather than one person/group but as the time passed, the behaviour proved to be unique and unlikely to belong to more than one person/group.
As ETH’s price began dropping faster, the Bitfinex whale longed harder and harder. On Black Thursday alone, they longed over 280,000 ETH (over $30,000,000 at the time). This unique behaviour proved that there is a high likelihood that it all belonged to the same person/group.
ETH longs on Bitfinex continued to increase by smaller increments until November 16th, the week ETH broke $500. We can estimate that the average entry on that ETH long is around $200, but for the sake of conservatism let’s say $300.
Dump?
This honestly created worry for us on our ETH bet, because a leveraged long eventually needs to be closed (at some point) and that would create excessive selling pressure especially for a trade of this size. It was one of the metrics we monitored closely and something did happen yesterday: The Bitfinex Whale closed their trade.
Market Effect
This person/group is without a doubt one of the brightest traders in the space, their order execution for closing their trade was very well thought out. In addition to Bitfinex having great liquidity and the availability of the “Claim” function.
The whale has closed out his position without creating an excessive market effect.
ETH Long closed on 9 January 2021
1,438,265ETH were taken off the long side on Bitfinex without a big market effect, which finally removes that cloud of uncertainty that was looming over our heads.
The Final Tally
Assume 1,400,000 ETH belonged to that same person/group with a conservative average open of $300 and close of $1,150 (based on yesterday’s prices.
Final Profit = 1,400,000 *($1,150-$300) = $1.2 BILLION
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