Bitcoin Offshoot becomes the latest victim of FTX’s contagion
(Bloomberg) — The fallout from the collapse of Sam Bankman-Fried’s FTX crypto empire has spread to a new corner of the digital asset market.
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Traders’ focus has turned to the price difference between Bitcoin and a derivative of the largest cryptocurrency called wrapped Bitcoin, which can be used on the rival Ethereum blockchain. Wrapped Bitcoin is backed 1-to-1 by the token, which is held in custody by digital trust firm BitGo. While it normally trades on par with Bitcoin, a “persistent” discount appeared in mid-November, according to blockchain data firm Kaiko.
Ranked as the #23 cryptocurrency by total market capitalization, Wrapped Bitcoin gained popularity during the peak of the decentralized finance boom. The version gives Bitcoin holders an easy way to trade, buy and sell these tokens in DeFi. The Bloomberg Galaxy Crypto Index has fallen more than 25% since Binance CEO Changpeng “CZ” Zhao raised concerns about FTX three weeks ago.
The discount has been triggered by concerns that the wrapped Bitcoin is not fully supported, given that Alameda Research – the trading desk founded by FTX’s Bankman-Fried – was once the largest seller to issue the offshoot. Executives at BitGo dismissed the speculation, saying via Twitter that all derivatives are backed 1-to-1 by Bitcoin held in custody by the firm.
“Everyone is afraid of everything these days,” said Evgeny Gaevoy, founder and CEO of crypto fund Wintermute.
“The whole point of using a custodian behind wrapped Bitcoin is to prevent the kind of failure like FTX,” BitGo CEO Mike Belshe said in an interview. “Now I realize there is a little market drift on the price due to some concerns, which is probably healthy, but it was small, it’s not a depeg. In fact, BitGo is one of a handful of companies out there trying to add market structure. Customers come to BitGo because we’ve done this right, we’ve put customers first, we’ve put security first.”
Previously, when wrapped Bitcoin traded below par to Bitcoin, the discount would create an arbitrage opportunity for traders. Hedge funds will buy the discounted wrapped Bitcoin in the spot market and then redeem it for the more expensive original cryptocurrency.
But in recent days, disparities like the one between Bitcoin and wrapped Bitcoin have come under the spotlight as investors and other market participants sift through the rubble of FTX’s implosion. Unfounded speculation has been particularly rife on Twitter and other social media platforms, where skeptics have fanned the flames with fear, gossip and even jokes, in a likely attempt to both dismiss and spark market chaos.
“There’s tons of FUD, and to sort through it, you have to be confident in what you know,” Michael Safai, co-founder of trading firm Dexterity Capital, said in an interview, using the acronym for “fear, uncertainty and doubt .”
Another reason the discount has been persistent was that many funds, which had money tied up in the now-defunct FTX exchange, do not have easy access to capital right now, as the trades would require borrowing Bitcoin, according to Gaevoy.
Gaevoy said Monday that his fund, Wintermute, executed the arbitrage trade and redeemed “some” Bitcoin back. The discount between wrapped Bitcoin and Bitcoin has largely recovered, based on data from TradingView and Binance.
Data from Dune Analytics shows that wrapped Bitcoin saw the largest monthly redemption event in November, with more than 28,000 wrapped Bitcoin redeemed back to the original coin.
(Updates with commentary from BitGo in the sixth paragraph.)
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