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Professional traders see if Bitfinex IEO can and should be bought

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A simple semi-quantitative (that is, imprecise) analysis of the potential risks and rewards of the upcoming BFX IEO

The author of the original post: AlbertTheKing

The author makes a simple semi-quantitative (that is, imprecise) analysis of the potential risks and rewards of the upcoming BFX IEO. At the end of this article, there is an introduction to the BFX IEO project made by D Group.

One, the reason for BFX's current round of IEO

Quite simply, since the USDT collateral shortage was exposed by NYAG, this round of IEO was conducted to ensure the market's confidence in USDT and BFX, and to make USDT become 100% us dollar collateral again in a legal sense. To put it bluntly, we need money to fill the hole. But it is important to note that BFX didn't "steal", no "super" usdt, collateral is insufficient because the situation of the serious lack of the channels in the bank BFX be pig teammates Crypto Capital to pit, BFX use Crypto $pathways and $850 million in Capital to do the Crypto Capital accounts, the Crypto Capital because of money laundering by governments to freeze the bank balance, that lead to the problem of insufficient usdt collateral.

Second, the main reference data and core elements of BFX IEO

Note: important update. According to the publicity materials released by BFX after the publication of this article, only 90% of LEO will be bought back with operating profits. BFX will stop buying back when there are only 100 million LEO left! This invalidated the article that IEO was equal to 27% of BFX's shares! That is, IEO is not issuing shares, you will not get a permanent stake!

The IEO (issued token will call LEO), one of the most important information is BFX will reduce the profit of at least 27% every month to buy back, LEO, some idea of the stock market's friends would know, operating companies to buy back shares is a very common, especially in U.S. stocks), repurchase and nature of share out bonus is the same, the difference is that the former can only reflect on shares, shareholders will not receive cash rewards (in addition to the difference on the tax, but given the currency circle estimate nobody care it is not in detail). Using 27% of its profits to buy it back effectively means BFX is selling 27% of its equity (knock on the board! That's the key! .

How much is the 27% stake in BFX going to sell for? $1 billion (actually $1 billion usdt). That means BFX currently values itself at $1 billion /27%= $3.7 billion

Based on BFX's 2018 earnings of $420 million, that's a p/e =37/4.2=8.9. Is 8.9 times earnings overvalued or undervalued? Look for industry comparisons.

Traditional companies with a similar nature to BFX are stock exchanges. For example, ICE, the world's largest exchange, currently trades at around 17.5 times earnings. Another example is A shares of citic securities, the current p/e is around 18 times. In fact, most exchanges trade at around 15-20 times earnings, which can be regarded as the valuation hub of the entire exchange industry.

In that sense, BFX's valuation of itself at 9 times earnings is half that of the traditional exchange sector, which is a fair comparison. (in fact, it is not so simple. I will make a detailed analysis later.)

Three, BFX IEO maximum variable

The purpose of this IEO is to fill the $850 million hole, and the big variable is how much of the frozen $850 million will be returned, and when. From a legal perspective, this $850 million is not BFX own assets, but BFX customer assets, so at the end of the anti-money laundering investigation, for there is no money laundering/illegal problem of money, is the original number can also must return to BFX (of course I'm not a legal expert, among all countries government to see if there is any $850 million confiscated way to handle it, I can't determine). According to IEO's preliminary white paper, 95% of the assets unfrozen will be used to buy back LEO, so the amount of assets unfrozen will equal the value of LEO. We literally clap his head said Numbers, according to the situation of the optimistic expectations, thaw the assets back 7-800 million, for example, assume that ultimately have $700 million to repurchase LEO, under the condition of the repurchase price is in line with IEO price (even inconsistent shareholder's benefit is roughly similar, so analysis of only the most simple case), there will be 700 million LEO is destroyed, the remaining 300 million LEO to enjoy BFX profit share out bonus of 27% per month. In this case, LEO's p/e ratio becomes 3/ (4.2*27%) =2.6 times (2018 earnings), compared to the 8.9p/e ratio calculated in this article.

Four, BFX IEO risk analysis

There are so many risks, I need to list them one by one, sorted by (hazard degree * probability) :

1. The biggest risk is actually American zf risk. I have said for a long time that the scariest thing about usdt is not "overhair", because BFX itself is profitable and does not need to take risks to be accused by thousands of men. The biggest threat to usdt is from the us zf. You have issued a currency that can be transferred freely and anonymously and peg to the us dollar, which is a clear challenge to the us zf's coinage and judicial power. It is totally expected that NYAG will target you this time, but it is unexpected that the us judicial authority will intervene after waiting so long. From the perspective of the currency circle, the issue of usdt actually contributed a lot to the prosperity of the currency circle, but feeling for feeling, this thing is the enemy of the us zf, the probability of eventually pulling it out should be said to be very considerable. It's hard to predict how much damage BFX will take in the process of pulling out this thorn in its side, especially given BFX's antagonistic attitude toward NYAG, which is likely to turn a small injury into a big one (literally, BFX is trying to kill it). Crocodiles, right? When the prey is bitten by an alligator, the harder it struggles, the tighter it bites.

2. The IEO itself also has the legal risk, especially the $1 billion the size of the IEO, can say the CSRC will note that eventually will be, will be how make, is also a big question, do not rule out without IEO BFX can still run as usual, after doing the IEO become operational couldn't operation cases; The operation of BFX is closely linked to the valuation of LEO, and BFX's profit will be greatly reduced if it cannot operate normally, resulting in the theoretical low p/e ratio of LEO turning into a high p/e ratio.

3. Default risk of BFX.

Unlike traditional stock exchanges, BFX is not heavily regulated. If the traditional exchange agreed on the dividend proportion, it must be implemented by the agreement, otherwise it will be severely punished by the CSRC. If BFX finally goes back on its word, it is needless to say that it will not repurchase, even if it simply reduces the repurchase ratio, or splits the company to split the high-profit business without paying LEO dividends. Is there any institution that can restrict BFX? I'm afraid not. So why is BFX's IEO trading at a lower p/e than traditional stock exchanges? It's just the risk of default. The risk of default leads to a risk premium, just as the interest rate on debt issued by companies with different ratings can be close to that of government bonds, so the interest rate on debt issued by risky companies (also known as junk bonds) can be several times higher.

4.BFX random risk.

BFX lost 120,000 bitcoins in 2016, when the currency was cheap. If 120,000 bitcoins are lost now, it will directly result in a deficit of $700 million. Will this happen again? No one can say for sure. When you buy LEO, these things can have the most immediate negative impact. (this time IEO also mentioned that if 120,000 bitcoins were recovered, 80% would be used to buy back LEO. Notice that three years later, only 28 bitcoins have been recovered. Well, here's one you can pretend doesn't exist...)

5. Operational risks of BFX.

BFX is an old exchange in the currency circle, but being old in the currency circle doesn't mean you won't die, nor does it mean you will be competitive, as binance shows. Will more competitive exchanges emerge to eat into BFX's market share? Is BFX going to go down on its own? These are risk factors that must be considered.

Five, BFX IEO potential return on investment and valuation

As mentioned in the third article above, LEO is likely to trade at a low price/earnings ratio of 2.6 in an optimistic scenario, which means that you can hold it for 2.6 years through dividends. For a lot of want to lie in the circle of money to earn friends, have such kind of equity opportunity can be said to be desirable.

Don'tIs this a cheap valuation? In fact, in the industry to compare, the best comparison is actually the year after BFX lost currency debt-to-equity p/e. If I remember correctly, when bonds convertible directly according to the historical data to calculate p/e ratio is 2 times (no other variables), actually than the IEO is worth a lot of, and then BFX was just a small exchange, the two years of high growth also brought huge returns to the investors, is also the time of the investors in low p/e bought high-growth stocks, in the traditional stock market is almost impossible to happen. Is BFX, currently valued at $3.7 billion, a small company? Will there be the same high growth? This is a matter of opinion.

6. The influence of BFX IEO on BTC market

According to rough estimates, this round of IEO will pump $1 billion into the market, which is equivalent to 1% of the current market value of BTC. It is also equivalent to a three-month increase in the selling pressure of new mines. It can be said that there is a lot of pressure on the currency price.

The author states: I have no interest in BFX or D Group zhao dong, nor do I have any assets in BFX. This article is a friendly analysis at the invitation of zhao dong, and I will not make any buy/no buy Suggestions.