On the price relation of RRT and LEO

In case of a recovery of the 119,756 BTC stolen in the 2016 hack, Bitfinex has committed to use 80% of the recovered net funds to buy back LEO over the course of 18 months. At $9,500/BTC the current value of the stolen BTC is around $1.13 billion, but before any recovered funds could be used to buy back LEO, all holders of RRT need to be paid first. Each Recovery Right Token makes his holder eligible to a payment of $1 per token. While the exact amount of RRT outstanding is unknown, the LEO whitepaper mentions 30 million token to be circulating ([https://www.bitfinex.com/wp-2019-05.pdf](https://www.bitfinex.com/wp-2019-05.pdf)). This would leave the maximum net buyback of LEO tokens to be $1.1 billion \* 0.8 = $880 million. Other factors reducing this amount in a case of a recovery would be that only a partial amount of the token can be recovered, there are legal costs attached to the recovery, or that there is a deal with the hacker(s) leaving them a part of the funds. A factor increasing the buyback funds would be an increase in the BTC price. While it is pure speculation how much funds would actually be used for LEO buybacks in the event of a material recovery, it would certainly be in the hundreds of millions. With LEO holders knowing that a couple of hundred million Dollars will be used for buybacks over the course of 18 months, ask orders will quickly vanish from the books while regular buybacks plus recovery buybacks need to be executed. In such an event we would see a strong positive demand shock being met by a negative supply shock causing the LEO price to skyrocket. An increase of the LEO price by $3 to – at current prices $4.15 – is everything but unlikely and to be assumed for further analysis. Well, but how likely is such a funds recovery? With so many elements driving the LEO price, it would be hard to quantify any effect of a new information on a funds recovery by looking at the LEO price. However, the design of the Recovery Right Token makes it easy to translate its price into how likely the market deems a recovery of those funds. With the only value of the token being the eligibility to a payment of $1 per token and one RRT currently trading at $0.025, this translates into a 2.5% chance that the funds will get recovered (not accounting for any time value of money). Now comes the core of the argument, which is the link between the RRT market price and the LEO market price: If we assume as above that a recovery would cause the LEO price to skyrocket by $3, the funds recovery are priced in with $0.075 – or around 6.5% of LEOs current market value. If RRT were to increase from $0.025 to $0.05 this would mean that the market sees the likelihood of a recovery being increased by 2.5 percentage points, which should, in theory, cause the LEO price to increase by $0.075. Having established this link between RRT and LEO theory, let’s see how it behaved in practice and look at recent price spikes of RRT and see if RRT and LEO moved in accordance. In February 2019 the price spiked to $0.065 after an announcement that 27.66 BTC were recovered from the hack ([https://medium.com/bitfinex/bitcoins-returned-to-bitfinex-by-u-s-government-51fe84e8bb12](https://medium.com/bitfinex/bitcoins-returned-to-bitfinex-by-u-s-government-51fe84e8bb12)). LEO did not exist back then, but it shows how the RRT market reacts to new information. A few months later on 7th of June more coins of the hack moved and the price of RRT rallied from $0.043 to nearly $0.08 on 24th June 2019. This translates into the market seeing a 3.7% higher likelihood of a funds recovery and should have induced a LEO price change of around $0.11. And indeed, during that time the price of LEO realised from $1.50 to nearly $2. Was this an overreaction or was the LEO price action blurred by other factors like the general bull sentiment at the time and a LEO hype? Certainly the latter plays a role, but given that LEO moved from $1.50 to $1.64 only on June 6th – the day the coins moved – I think that there was a mismatch between LEO and RRT markets pricing in the new information at the time. This mismatch could have been exploited by selling LEO and buying RRT. The next time coins from the hack moved was 12th of August 2019 but neither the RRT nor the LEO price moved. A few days ago (22nd of May) some coins moved yet again and this time the RRT market reacted with a price move of $0.018 to $0.03 (actually happening a day later on 23rd of May). If we apply the above logic, this translates into an increase of the chances of funds recovery of 1.2 percentage points we should have seen a price move of around $0.036 in LEO. However, while LEO is on a consistent move upwards the last weeks, it barely moved on that day. Hence, we saw a mismatch of the prices, although this time the other way around and the exploitation would have been to sell RRT and buy LEO. Let’s be honest here: the RRT market is not liquid enough to give precise signals on the likelihood of a recovery of the stolen funds: even a small buy or sell order could move the market. I would thus refrain to move on any RRT-LEO trades on the above logic, while the mismatch is only small and only act, if there is a large mismatch (think of RRT moving close to $1 without LEO keeping track). The main point here is to unveil the link between RRT and LEO, which is likely unknown to most traders.