The digital-asset market has been affected by the fallout of Sam Bankman Fried’s FTX crypto empire.
The price difference between Bitcoin and wrapped Bitcoin, a derivative of the most popular cryptocurrency, has been the focus. Wrapped Bitcoin can be used on the Ethereum blockchain. Wrapped Bitcoin is 1-to-1 backed by the token. They are kept in custody by the digital-trust company BitGo. According to Kaiko, a blockchain-data firm, the token trades at par with Bitcoin. However, in mid-November, there was a “persistent discount”.
Wrapped Bitcoin is the No. Wrapped Bitcoin, which is ranked as the No. 23 cryptocurrency in total market value, gained popularity at the height of the decentralized finance boom. This version allows Bitcoin holders to trade, buy, and sell tokens in DeFi. Since Changpeng ’CZ’ Zhao, Binance chief, raised concerns about FTX three weeks ago, the Bloomberg Galaxy Crypto Index has fallen more than 25%.
Concerns that the wrapped Bitcoin may not be fully backed have prompted the discount. Alameda Research, the trading desk founded by FTX’s Bankman-Fried, was once the largest merchant to issue the offshoot. BitGo executives dismissed the speculation by tweeting that all derivatives are backed 1-to-1 with Bitcoin custodied at the firm.
Evgeny Gaevoy (founder and chief executive of the crypto fund Wintermute) stated that “Everyone is afraid about everything these days.”
BitGo, which is located in Palo Alto (California), did not respond to a request for comment.
Wrapped Bitcoin used to trade below Bitcoin’s price, so traders could take advantage of the arbitrage. Hedge funds would purchase the discounted wrapped Bitcoin on the spot market, and then redeem it for the original, more expensive cryptocurrency.
As investors and other market participants sift through the debris left by FTX’s collapse, it has been apparent that there are many disparities between Bitcoin and wrapped Bitcoin. Twitter and other social media platforms have seen a lot of unfounded speculation. Sceptics have used fear, gossip, and jokes to try and discredit the market and create chaos.
In an interview, Michael Safai, cofounder of trading firm Dexterity Capital said, “There are tons and lots of FUD”
Another reason why the discount was persistent is that many funds with money on the now-defunct FTX Exchange aren’t able to access capital right now because the trades would require borrowing Bitcoin. According to Gaevoy,
Gaevoy stated Monday that Wintermute, his fund, had executed the arbitrage trade, and received “some” Bitcoin back. Based on Binance and TradingView data, the discount between wrapped Bitcoins and Bitcoin has mostly recovered.
Dune Analytics data shows that wrapped Bitcoin was the most popular monthly redemption event in November. More than 28,000 wrapped Bitcoin were redeemed back at the original coin.
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