Bitcoin Offshoot becomes latest victim of FTX contagion

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(Bloomberg) – The fallout from the collapse of the Sam Bankman-Frieds FTX crypto empire has spread to a new corner of the digital asset market.

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Traders’ attention has turned to the price disparity 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 owned by digital trust company BitGo. While it normally trades on par with Bitcoin, a persistent discount emerged in mid-November, according to blockchain data firm Kaiko.

Wrapped Bitcoin, which is ranked as the #23 cryptocurrency by total market value, gained popularity during the height of the decentralized finance boom. The release offers 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 chief Changpeng CZ Zhao raised concerns about FTX three weeks ago.

The discount was triggered by fears that Wrapped Bitcoin was not fully backed, given that Alameda Research – the trading desk co-founded by FTXs Bankman-Fried – was once the largest merchant to issue the offshoot. BitGo executives dismissed the speculation, saying via Twitter that all derivatives are backed 1-to-1 by company-owned Bitcoin.

Everyone is scared of everything these days, said Evgeny Gaevoy, founder and managing director of crypto fund Wintermute.

The point of using a custodian behind wrapped bitcoin is to prevent the type of failure like FTX, BitGo CEO Mike Belshe said in an interview. Now I realize there is a bit of market slippage on the price due to some concerns, which is probably healthy, but it was small, not a depeg. In fact, BitGo is one of the few companies trying to add market structure. Customers come to BitGo because we did it right, we put customers first, we put security first.

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In the past, when Wrapped Bitcoin traded below par against Bitcoin, the discount created an arbitrage opportunity for traders. Hedge funds would buy the discounted packaged Bitcoin in the spot market and then buy it back for the more expensive original cryptocurrency.

But in recent days, disparities such as that between Bitcoin and Wrapped Bitcoin have been in the spotlight as investors and other market participants sift through the rubble left by the FTX implosion. Unfounded speculation has been particularly rampant on Twitter and other social media platforms, where skeptics have fanned the flames with fear, gossip and even jokes, in a likely attempt to dismiss and cause market chaos.

There are tons of FUD and to sort them out you have to trust what you know, Michael Safai, co-founder of trading firm Dexterity Capital, said in an interview, using the acronym fear, d uncertainty and doubt.

Another reason why the rebate has been lingering is that many funds, which had cash tied up on the now defunct FTX exchange, are not able to easily access capital at this time, as transactions would require borrowing Bitcoin, according to Gaevoy.

Gaevoy said on Monday that his fund, Wintermute, executed the arbitrage trade and redeemed Bitcoin. The rebate 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 over 28,000 wrapped bitcoins traded for the original coin.

(Updates with comment from BitGo in sixth paragraph.)

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