(cache) 5 Reasons Why Bitfinex's Compensation Plan Might Be The Best Option

Last week Bitfinex lost over $60M in bitcoin, due to a hack on their multi-signature wallet. The wallet was jointly managed by BitGo, a company that allegedly specializes in keeping private keys secure.

Bitfinex responded to the hack by implementing a socialized loss strategy. Every Bitfinex account will receive a 36.067% haircut to manage the losses and keep the exchange solvent.

To compensate for the loss, Bitfinex will be issuing out a BFX tokens that will record the debt and may be redeemable for company stock in the future.

As someone who suffered a loss as a result of the hack, I feel that their strategy is more than fair.

Here is my reasoning…

#1: Traders Are Partially Responsible

Being a good trader means taking responsibility for the risk involved by our actions. Risk management is the foundation of effective trading and every crypto trader knows that counterparty risk is the biggest danger.

There are several steps one can implement that can greatly reduce counterparty risk. The #1 rule for trading is to only invest money that you can afford to lose.

Active traders know that keeping some coins on an exchange can’t be avoided. That said, anytime you send your money to a crypto exchange you need to acknowledge that you stand to risk 100% of your investment. If you can’t afford to take the hit then you need to reduce your trading size.

We all know that cryptocurrency exchanges get hacked on a regular basis and anyone who avoids taking partial responsibility for their losses should probably stop trading immediately.

The inability to take partial responsibility for any losses means that the trader didn’t fully acknowledge the risks involved. The harsh reality for crypto traders is that hacks are a part of the cost of doing business.

Other decentralized exchanges like Bitsquare exist, yet most of us choose to send the majority of our liquidity to centralized options.

#2: It’s Not A Complete Loss

Sometimes hacks can lead to a 100% loss for all users. This would have been the worst case scenario and fortunately that’s not what happened.

Some users who aren’t holding bitcoin are angry that they’re also losing 36.07% of their account. A socialized loss is likely the fairest way of dealing with the situation because everyone shares the risk equally.

Every single account holder knows the dangers, are bound by the exact same terms and therefore should have an equal share in the loss. Anyone who doesn’t take partial responsibility for their loss failed to acknowledge the terms and conditions that they agreed to by sending money to Bitfinex…

“16 Limitation of Liability & Release: Important: Except as may be provided for in these Terms of Service, Bitfinex and BitGo assume no liability or responsibility for and shall have no liability or responsibility for any claim, application, loss, injury, delay, accident, cost, business interruption costs, or any other expenses (including, without limitation, attorneys’ fees or the costs of any claim or suit), nor for any incidental, direct, indirect, general, special, punitive, exemplary, or consequential damages, loss of goodwill or business profits, work stoppage, data loss, computer failure or malfunction, or any and all other commercial losses (collectively, referred to herein as “Losses”) directly or indirectly arising out of or related to:

16.1these Terms of Service;
16.2the Site, and your use of it;
16.3BitGo, and your use of it;
16.4your use of BitGo’s services;
16.5the Services, and your use of any of them;
16.6the real or perceived value of any currencies or Digital Tokens traded on the Site, or the price of any Digital Token displayed on the Site at any time;
16.7any failure, delay, malfunction, interruption, or decision by BitGo or Bitfinex in operating the Site or providing any Service;
16.8any stolen, lost, or unauthorized use of your account information any breach of security or data breach related to your account information; or
16.9any offer, representation, suggestion, statement, or claim made about Bitfinex, BitGo, the Site, or any Service by any Associate.

You hereby agree to release the Associates from liability for any and all Losses, and you shall indemnify and save and hold the Associates harmless from and against all Losses. The foregoing limitations of liability shall apply whether the alleged liability or Losses are based on contract, negligence, tort, unjust enrichment, strict liability, or any other basis, even if the Associates have been advised of or should have known of the possibility of such losses and damages, and without regard to the success or effectiveness of any other remedies.”

All liability of loss was waived by each user but we’re still getting 63.93% of our money back. Although this is still a significant loss it could be much worse, as many past examples led to a complete 100% loss.

#3: There’s Still a Chance of Making ROI

The 36.067% loss still has a chance of being recouped and perhaps even making a profit. Bitfinex is acknowledging the debt by issuing out a token that might be redeemed for company shares in the future.

Bitfinex is one of the largest BTC/USD exchanges in the world and their tokens do actually have a chance of making ROI. Having paid dividends from a large exchange might actually be a good way to earn passive income.

In the event that these tokens trade on the open markets, then smart traders still have a chance of turning a profit by executing an effective strategy. This compensation system introduces new variables that can open opportunities that didn’t exist before.

Rather than whining and complaining, traders could turn these lemons into lemonade. Personally, I feel that my energy is better invested in building a strategy to profit from the situation as oppose to wasting time crying over spilt milk.

#4: Litigation is Expensive and Time Consuming

Taking Bitfinex to court will be a long and expensive battle that may or may not get you the same returns. Right now users will get 63.93% of their funds immediately with the remaining 36.07% issued as a promise to pay.

These funds will likely be available sooner than later and the tokens do give users a chance at receiving 100% of their funds at a future date. If you’re pissed off you need to take a step back, manage your emotions and think about the situation like a strategist.

If everyone takes Bitfinex to court, then their remaining capital will get burnt up in lawyer’s fees and a bankruptcy would likely pay less than 63.93% with a zero chance of a 100% recovery. Not to mention you will also have to invest in lawyer’s fees and risk losing even more money.

Tying up Bitfinex’s resources in court will reduce their profit margin and ability to fully pay back users with their BFX tokens.

In the event that Bitfinex declares bankruptcy it will be several years before you even see a cent. As a trader I feel this scenario has a really bad risk to reward.

For an ecosystem that champions decentralization and self-governance we should make every attempt to solve our own problems internally. Running to regulators should be a last resort only if no other viable solutions are on the table.

#5: Taking Down One of the Largest Exchanges is Bad for Business

When a large Bitcoin business goes under it hurts the entire ecosystem. Regardless of counterparty risk, exchanges do offer a valuable service by providing liquidity to traders, users, merchants and miners. Without this liquidity bitcoin would fail to be a viable currency.

Having Bitfinex go bankrupt will hurt the industry and potentially put a dent in the overall marketcap of bitcoin.

Alternatively, solving our own problems without involving the system can help strengthen the ecosystem. Anytime an exchange survives a hack they can better their security and grow stronger.

There are several examples of exchanges becoming more successful after surviving a hack. Poloniex was hacked in the early days and managed to reimburse their users through fees. The BFX tokens are an acknowledgement of the loss and if patient might lead to a full recovery of funds.

Conclusion

As someone who also lost money on Bitfinex I’m looking at this situation through the eye’s of a trader by weighing out the risk to reward. In no way am I condoning the mistakes of Bitfinex or BitGo.

To sweeten the deal I also think BitGo should share in some of the blame and contribute to the compensation plan. The hack did happen on their watch and their entire reason d’etre is to keep our coins secure.

That said, I think that the responsibility should be shared four ways between Bitfinex, BitGo, the hacker and the end user.

Those who cry foul over social media and point blame everywhere but at themselves are likely not suited for trading. Successful trading is probably 10% strategy and 90% managing emotions. We knew the risks, agreed to the terms and now we need to stop whining and help work towards the solution.

If you wage war against Bitfinex then you’re also reducing everyone’s chances of making a full recovery. Mistakes happen, we all make them so let’s move on and learn from them.