Bitfinex sees institutional demand for tether-bitcoin swap

Digital asset exchange Bitfinex is seeing growth in demand for crypto-derivatives that play to increasingly sophisticated cross-asset trading strategies as the number of participants from traditional markets increases.

“Bitfinex has about 50 HFT (high-frequency algorithmic trading) firms active on the platform,” Paolo Ardoino, chief technology officer at Bitfinex Derivatives, told Global Investor.

“The presence of large traders in crypto on the exchange is growing. Bitfinex is providing a variety of colocation and proximity hosting services to meet this growing demand as more participants from conventional markets gravitate towards the space.”

The crypto exchange, which offers its derivatives via iFinex Financial Technologies, has taken a number of steps to provide institutional cryptocurrency connectivity and security for banks, brokers and hedge funds, Ardoino said.

These include a collaboration with Market Synergy in Switzerland and last month’s integration of ClearLoop, an instant off-exchange settlement and clearing network developed by London-based digital asset infrastructure provider Copper.

Large traders are also able to obtain secure connectivity via a FIX feed or ISP link to Bitfinex’s digital asset gateway, Ardoino added.

In connection with the demand trend, Bitfinex this month added a tether gold/bitcoin contract to its suite of cryptocurrency/US dollar perpetual swaps, which according to Ardoino have already been used extensively on the platform, notably in cross-asset class trading strategies.

“This latest addition…comes in response to demand from our growing customer base,” Ardoino said. “This product facilitates the management of risk and hedging, while also enhancing the deployment of sophisticated trading strategies. For example, market participants can use the offering to trade correlations between bitcoin and gold.”

Tether has been available for trading on Bitfinex since 2018, and was last year integrated to the exchange's OMG network, a platform that enables peer-to-peer transactions in real time.

According to Bitfinex, the new contract is more conducive to intra-day spread trading strategies than Bitfinex’s existing tether gold/US dollar and bitcoin/US dollar pairs, as it offers lower transaction fees and the capacity to move more quickly between positions.

“The fact that it's two legs rolled into one means adding to or reducing a position size takes half the time,” Ardoino said. “This type of play, which is favoured by major high frequency trading firms, is especially effective on news-flow trading days, such as when news of a vaccine for Covid-19 triggered a ‘risk-on’ trade.

A risk-on trade refers to partially hedged positions as opposed to naked long positions versus the US dollar.

“If you only trade gold in US dollar terms, you're either long or short. Hence when the market sentiment shifts, it's binary as to whether you win or lose on that day depending on whether you're long or short on gold," Ardoino explained.

“If you trade gold versus bitcoin instead, then they will both move, meaning that you may lose on your gold position but make some, all or more PnL (daily value change) on your bitcoin direction.”

CME told Global Investor earlier this month that the rapid rise in the value of bitcoin was a key driver in the development of the US group's upcoming micro bitcoin future, which is set to launch on May 3.