The War On Shitcoins Episode 18: LEO. The war on is a Crypto.IQ series that targets and shoots down that are not worth investing in either due to their being, having serious design flaws, being centralized, or in general just being worthless copies of other cryptocurrencies. There are thousands of that are ruining the markets, and CryptoIQ intends to expose all of them. The crypto space needs an exorcism, and we are happy to provide it.

Bitfinex conducted a highly successful initial exchange offering (IEO) in the middle of May, raising $1 billion by selling 1 billion LEO tokens for 1 Tether (USDT) each. All of the 1 billion LEO tokens were purchased in a private sale, with investments ranging from $1 million to $100 million, meaning the public had no chance to buy LEO tokens until after launch. 

This caused a speculative frenzy when the LEO trading pair on Bitfinex went live, pushing the price of LEO up to nearly $2, which was a rally of 100%. 

There are perhaps multiple reasons for the initial popularity of the LEO token. First off, the LEO token is an exchange token much like Binance Coin (BNB), and Binance Coin (BNB) has been highly successful, so investors probably speculated that the LEO token would be highly successful too. 

Also, Bitfinex promised to burn LEO tokens constantly using 27% of gross revenue until all LEO tokens were burned, in addition to 80% of money recovered from the 120,000 Bitcoin (BTC) Bitfinex hack in August 2016, and 95% of any money recovered from an $850 million loss at Crypto Capital. 

This creates a situation where supply constantly decreases, in addition to buying pressure as Bitfinex buys LEO tokens to burn, which should theoretically increase price, with the potential for a dramatic spike in buying pressure if funds are recovered from Crypto Capital or the 2016 hack. 

However, the LEO token has consistently lost value since its initial rally of 100%, and over the past week, LEO dropped below the IEO price of $1 for the first time, to as low as $0.945. If this long term trend continues then LEO may drop well below the IEO price, causing big losses for investors. 

In order to understand why this is happening, it is important to understand the conditions under which the LEO token launched in the first place. 

Near the end of April Bitfinex and Tether Limited were sued by the New York Attorney General’s Office. Due to the repeated loss of bank accounts at Wells Fargo and then Noble Bank in Puerto Rico, Bitfinex and Tether Limited used Crypto Capital as a pseudo-bank. However, Crypto Capital was connected with money laundering, resulting in the seizure of $850 million of Bitfinex’s money at Crypto Capital. 

In order to keep Bitfinex running despite this tremendous loss of cash, Bitfinex took $625 million out of Tether’s (USDT) reserves, breaking the promise that each Tether (USDT) would be backed by a dollar in the bank. Then Bitfinex took out a $900 million line of credit with a 6.5% interest rate to cover the loss. None of this information was disclosed to Bitfinex and Tether (USDT) users until the New York Attorney General’s lawsuit went public. 

Soon after the lawsuit went public the line of credit was frozen, although $700 million had already been used, and Bitfinex was forbidden from taking any more loans from Tether Limited. 

Lo and behold, only a few weeks after the lawsuit began, Bitfinex launched the $1 billion LEO IEO, making a quick $1 billion of cash, presumably enough to pay back the line of credit and to cover the loss at Crypto Capital. It was certainly a very aggressive thing to do right in the middle of a lawsuit with the New York Attorney General’s Office, but it worked. 

Essentially, at the time of the LEO launch investors were told that the money at Crypto Capital would probably be recovered. Buying LEO was essentially a gamble that Bitfinex would win the lawsuit and get their money back, and if that happened LEO would drastically jump in price since most LEO tokens would be burned at that point. 

However, it is now 5 months since the LEO token launch and the situation for Bitfinex and Tether Limited has only worsened. There is now a new class-action lawsuit asking for damages in excess of $1.4 trillion. The allegation is that Bitfinex and Tether Limited conspired to cause the Bitcoin (BTC) bubble of late 2017 by printing billions of dollars of unbacked Tether (USDT), and therefore all of the crypto market losses since the end of 2017 are Bitfinex’s and Tether Limited’s responsibility. A full analysis of the class action lawsuit can be read here

Also, the New York Attorney General’s Office lawsuit has been put on stay since this summer, but the stay will expire in November, with court hearings expected in early 2020. 

The combined force of the New York Attorney General’s Office lawsuit and the class action lawsuit, collectively alleging money laundering, bank fraud, market manipulation, lying about Tether’s (USDT) reserves, racketeering, and lack of proper money transmitter licenses has the potential to do severe damage to Bitfinex and Tether Limited, although that remains to be seen. 

Back to the main point, LEO token was a gamble that Bitfinex and Tether Limited would win the lawsuits and remain fully functional, but that is looking like a risky gamble at this point. The free market is responding to this risk via the LEO token dropping below its IEO price of $1. 

Further, after four months of burning tokens, only 7.28 million LEO tokens have been burned, which is less than 1%. Combined with the likelihood that the $850 million will not be recovered from Crypto Capital, nor any of the money from the 2016 hack, this suggests that the burn rate will be insufficient to overcome the selling pressure from negative speculation.

Thus, the LEO token appears to have a bleak future. Investors may lose big, especially since there is not enough liquidity for the early private investors to sell large chunks of LEO tokens without crashing the market. 

If Bitfinex and Tether Limited end up being sanctioned in any negative way by the court in the coming months, which appears probable considering that the Department of Justice (DOJ), Commodity Futures Trading Commission (CFTC), and the New York Attorney General’s Office are aggressively investigating and prosecuting the case, then the LEO token would likely crash.