Trading Tether
By: Yi Zhang
Tags: Cryptocurrency, Tether, Bitcoin, Trading

Given the recent volatility in the tether markets, we’d like to share our tips for trading tether. We think it’s an important cryptocurrency to understand as it facilitates trading and access to some of the most liquid currency pairs in the crypto markets (e.g. — BTC/USDT on binance). It’s also an important linkage between different exchanges, allowing for arbitrages between fiat and non-fiat exchanges more efficiently due to its relatively stable price.

Spot Price: The challenge of finding a good price of tether comes from the fact that there are few direct USDT/USD pairs listed. Kraken offers a USDT/USD pair but volumes there are relatively light compared to the tether market as a whole. We suggest avoiding the use of coinmarketcap price data for trading decisions as the crypto markets are fragmented and using an aggregate price across all exchanges results in inconsistent pricing.

Our pricing benchmark of choice is a BTC/USD index such as Tradeblock’s XBX or CME BRTI and the binance BTC/USDT pair (which tends to be more liquid than Bitfinex’s own BTC/USD pair). Dividing the BTC/USD index price by the BTC/USDT price should yield an implied tether price. For example, as of November 13, 2018 the implied tether price would be (6279 / 6466 = .9711 USDT/USD price).

The chart below compares the various ways USDT/USD can be calculated. Notice how they sometimes differ quite significantly.

Sources: binance, coinmarketcap.com, kraken, tradeblock

Supply/Demand: It’s useful to monitor the activities of the Tether Treasury wallet:https://www.omniexplorer.info/address/1NTMakcgVwQpMdGxRQnFKyb3G1FAJysSfz

This is where tether goes when it’s minted and it’s also the wallet that houses tether before it’s destroyed. Since the beginning of October, over 1 billion USDT has been sent to this address and 500 million USDT has been destroyed. As tether has been removed from circulation, the price has recovered from its lows.

The chart below summarizes wallet activity over the past 6 weeks.

Sources: omniexplorer.info

On the demand side, we’ve observed an interesting phenomenon, which is a drop in volumes, particularly on Binance’s BTC/USDT. It’s not entirely clear why volumes have dropped off but one reason could be that people are less willing to hold USDT and so are avoiding that particular trading pair in favor of fiat alternatives. One data point supporting this idea is the fact that most of the tether that has flowed into Tether’s treasury wallet has come from Binance, which at one point, held over 1 billion USDT. That figure is down by almost 400MM as of November 13th: https://wallet.tether.to/richlist

The chart below shows the drop in volumes on Binance, which was averaging 36,000 BTC per day during September, but only averaging 12,500 BTC per day since October 15th following the sell-off in tether.

sources: binance.com

Bitfinex, Tether, and Convertibility: If you monitor the tether address linked above, you’ll notice that Bitfinex’s own tether wallet often makes deposits and withdrawals from the Tether Treasury. While this is not a definitive sign that Tether is facilitating convertibility between tether and dollars, it is a suggestive data point. Note that due to Bitfinex’s special relationship with Tether, the exchange’s BTC/USD price will most often track the BTC/USDT price rather than the BTC/USD price. In this way, fiat pairs on Bitfinex are essentially “equivalent” to tether pairs.

Going Forward: Since announcing that Deltec was Tether’s bank, transfers from Bitfinex to the Tether Treasury have slowed down, with only a single transfer of 70MM on November 11. Tether’s price had stabilized at a discount below 1, trading in a range from .98 USD to .993 USD for the most part although it recently sold off again due to reports of new withdrawal limits and fees. At this point, the market has priced in a healthy risk premium for tether as the supply of outstanding tether has stabilized around 1.7 Billion USDT. It will be interesting to see if further reductions in the tether circulating supply could help push the tether price back towards parity with USD.