Why are Tether tokens selling for less than 1 USD?

As I write this*, the kraken exchange has tether tokens sitting at roughly 98c (https://www.kraken.com/charts, USDT/USD pair). This means that you can buy one tether token for that amount of USD.

This is interesting in and of itself, as a tether token is a redeemable IOU for 1 USD.

If you’re new to arbitrage, crypto, or just like reading, read this first. It’s short and has pictures, so it’s pretty neat. From here I jump straight in and assume you know everything detailed in that article.

The whole point of this article is to ask “why isn’t tether always trading at around 1USD”. We’ll look at kraken for this purpose — https://www.kraken.com/charts (USDT/USD pairing), although other exchanges will also be applicable.

A note — the bitfinex exchange *looks* like USDT/USD is trading at ~the same value, but that’s because you can only withdraw USDT from bitfinex (ie you can get all the USD you want, but when you withdraw you get USDT back). Some users can withdraw USD, but this is a long process (apparently weeks) with the same fees as withdrawing tether… so the two are treated identically there.

So, Jumping in… why isn’t tether always trading at around 1USD

It’s crypto, you might as well.

Tether token fees along with arbitrage mean different crypto exchanges have different fees for different products. Effectively, every actor in the crypto system has to treat tether like it is worth somewhere between 97C & 99c.

This is something that the otherwise very worth following Bitfinex’ed, in my opinion, keeps getting wrong when talking about the “tether risk factor” supposedly shown at http://www.untether.space/.

Effectively every actor?

No. While all other market participants are stuck with that… uncommon fee structure that tether/bitfinex offer, there is one market participant that doesn’t have this problem, and can use this for profit

Suspense! Drum roll!

Sure. It’s the tether company. The CEO of tether can turn, right now, to some employee Alice and say

“Alice, tethers are trading at 98.5 cents on kraken (or another exchange) right now. Each tether is an IOU from us to pay the holder 1 USD. Let’s buy all all the tethers selling for less than a USD on kraken, because that means we were given a dollar but only had to pay back less than a dollar, which is risk free profit”.

And any sane person would do this — in November, Kraken had tethers selling for 97c! That is, for the good folk at tether, a good ~3% risk free return for doing very little. There is often around 3–6 million dollars worth of tethers selling for less than a dollar. Assuming an average profit of 1% (some are for sale at 97c, others at 99.999c), that’s anywhere from 30 to 60 thousand USD just… sitting there, waiting for the tether company to take.

Who doesn’t take risk-free profit?

I’m not sure, especially when you’re talking about the people involved in exchanges, who are literally operating for profit.

So… why not?

1. They are unaware of the opportunity?
2. It’s illegal? I very much doubt that it is illegal to make a profit in an open marketplace.
3. They don’t have the money to invest, it’s all tied up in operational costs? Seems they shouldn’t be running an exchange if that’s the case!
4. Their withdrawal fee is pure profit, as actual costs for refunding customers is ~0? The time value of money would play a part in this, of course
5. They can always make more with their money, risk free, in some other manner. Why bother with ~1% if they can always make 1.1% (or more)?
6. They don’t care about making small amounts of money???
7. They don’t have access to the technical/trading expertise to execute this? This seems especially unlikely as they run a online crypto exchange.
8. Tethers are/were sold in bulk at a discount?

Explain that last one — why would they sell 1USD IOU’s at a discount?

Well, first it’s odd that someone would buy in bulk at the advertised 1 USD price. I mean, they’d know the cost to withdraw is 3% (tethers typically appear in batches of 50 & 100 million dollars so they’ll have higher withdrawal fees), and the sheer fact they’re using tether makes everything cost more. I mean, it means that 1000 USD is converted into 1000 USDT with the buying power of… ~998 USD.

But?

… but some 3rd party would buy in for less than a dollar. So the Tether company could sell tether tokens to someone for 96c (or less —theoretically, any value less than ~97c works), that person would exchange it for bitcoin and sell that for USD. That would explain why people bulk buy tethers, and also why the tether company would never buy tethers on another exchange at, say, 98c (because they received less than ~97c for it).

I’m honestly not sure why the tether team aren’t operating on other exchanges . Doing so would certainly prop up the USDT/USD price, and eliminate all the market variance that that imbalance causes.

I’d be interested in other thoughts and theories on why the tether team aren’t making use of the profit available to them.

• When I wrote this article USDT/USD was at ~98c, but right *now* as I go to publish, it’s at ~99.4c. This is certainly higher, and most probably because someone doesn’t realise there are pretty punitive withdrawal fees — just like this guy. But it’s definitely not because the tether company are acting on the exchange (the price would be ~1USD if that were the case), so my questioning still stands. But the price has been moving a fair bit daily, so who knows what it will be when you read, dear reader!