There’s free money on offer from a sloppy crypto exchange

There’s free money on offer from a sloppy crypto exchange

There’s a chance to make some free money today at the expense of one of the bitcoin exchanges. It’s to do with the upcoming bitcoin fork. But you’ll have to act in the next hour or two.

First up: what’s the bitcoin fork?

Basically it means bitcoin is spinning off a separate currency, which is to be called bitcoin cash (BCH). Bitcoin (BTC) owners will get the new currency for free, in 1:1 proportion to the amount of BTC they own. So if you own say 0.5 BTC, you’ll wake up the day of the fork with 0.5 BTC and 0.5 BCH cash in your wallet.

(I won’t get into the reasons for the fork here. It’s a long story. I wrote about it a couple of weeks ago: Bitcoin will split in two by Autumn.)

So what’s this opportunity?

Well it’s to do with the cryptocurrency exchange Bitfinex.  Bitfinex is a site which allows users to buy and sell their cryptocurrencies; and also to bet on the short-term movement of cryptocurrencies using margin trading.

(What’s margin trading? It’s when the exchange lends you money to bet on price movements. It’s how you “go short” a crypto, ie bet its price will go down.)

Bitfinex’s plan for how to handle the bitcoin cash fork is totally screwed up. It leaves open a massive loophole for traders to make some free money.

Here’s their plan:

1. All BTC wallet balances will receive BCH
2. Margin longs in BTC/USD and margin shorts in XXX/BTC will not receive BCH
3. Margin shorts in BTC/USD and margin longs in XXX/BTC will not pay BCH
4. BTC Lenders will receive BCH

Can you spot the problem?

Bitfinex is planning to give a BCH to everyone who owns has a bitcoin in their wallet…

But it’s not planning to give or take BCH to/from anyone who’s long or short BTC using margin trading.

That means you can go short 1 BTC on Bitfinex using margin trading; then buy 1 BTC somewhere else and put it in your wallet. You’re now fully hedged. Whichever direction the BTC price moves, you’re covered.

But you’ve now got a BTC in your wallet, which means you’re entitled to 1 BCH for free in accordance with the rules of the fork.

The fork happens at 13.20 British Summer Time, today. So if you’re able to act quickly and get your trade in place, you’ve a chance to earn some free BCH before you head out for lunch.

So what’s the catch?

Well there’s a scenario where you lose money: if the price of BTC goes up, your short position would be liquidated. Then you’d be long bitcoin, unhedged. If the price fell directly after that, before you were able to sell, you’d lose out.

There’s also a chance of something called a “short squeeze”. A short squeeze happens when lots of people are short on a stock (or cryptocurrency) at the same time; and they all try to cover their short positions by buying a long position. This action can send the price shooting up.

To place a margin trade you’ll need an account with Bitfinex. Setting one up is quick and easy. But the exchange isn’t accepting cash deposits at the moment. This means you’ll have to deposit a crypto like bitcoin or ethereum if you want to try this. You can buy them from a site like coinbase. There’s no need to transfer the BTC into Bitfinex, since the other exchanges will give you BCC for BTC no problem.

The other risk is that Bitfinex spots the problem and closes this loophole before tomorrow. This wouldn’t surprise me – a look at the net short positions in bitcoin tells me that a lot of people have cottoned onto this.

The following chart shows net long positions in bitcoin (in green) versus net short positions (in red) since January. And as you can see, people have been piling into short positions on bitcoin in the last few days.

Bitcoin short positions are at a
12 month high


Click image to enlarge.

Short bitcoin positions are up 616% in the last four days, to their highest level in more than a year. I learned about this from two crypto traders on twitter, though by no means is the whole internet talking about it.

So, how much money are we talking?

Well you’d be entitled to 1 BCC for every BTC, and BCC is trading at 0.11 BTC in (extremely illiquid and not fully reliable) BCC futures markets as I write. So you’d be looking at a roughly 5-15% return, less fees.

How have Bitfinex allowed this to happen? Well they’re a sloppy outfit. Already they’ve been hacked for $60m worth of coin.

So there you have it. One of the peculiar opportunities the crypto markets, which are still a bit underdeveloped and amateurish, throws out every once in a while. I’ve laid out the case as I see, but you’ve got a few hours to do your own research and decide whether this is worth a go.