Efficient Frontier
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Efficient Frontier

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Efficient Frontier derivatives and markets newsletter. Diving into the cyberpunk-dollar world of Tether and and taking a look at how the Bitcoin markets decisive traders and take their money.

Hi, welcome to our 5th edition. This week we’re shining a spotlight on one of the strangest creatures of the cryptocurrency universe- Tether.

First, a quick overview

Bitcoin moving above and under the $10,000 is sparking a lot of emotions, while traders keep returning to the exchanges as seen below:

On June 1st Bitcoin’s move from around $9,500 to $10,300 in one day, caused the largest position liquidations of short positions in over 6 months, as the blue bar on the right shows below:

Ironically, the excitement caused by this large swing created even more damage to speculators the next day, as the price fell back sharply to around $9,200 (and close to $8,600 on BitMEX) before recovering to around $9,500 where it is currently.

This excitement can be observed in the Bitcoin perpetual swap’s funding rates which jumped on June 2nd to high levels across exchanges, as seen above, showing the high pressure to be long Bitcoin through the perpetual swaps. This pressure created the many long liquidations that followed.

Bitcoin’s are leaving spot exchanges:

According to GlassNode 310,000 $BTC have moved out of exchanges since the May 12th and 13th crash.

Bitcoin’s hashrate starts recovering after 2 difficulty adjustments post the halvening.

At risk of sounding like a broken record…

Source: skew

Focusing on the positive, open interest in Bitcoin options on CME and Deribit are again breaking records, joined by Ethereum options on Deribit which just passed $135 million of open interest and also broke its all-time records in volume on June 1st with $30 million dollars traded.

Tethered markets

Tether (USDT) was founded in 2014 using Mastercoin (now Omni) on Bitcoin’s blockchain and used mostly for trading and remittance across the cryptocurrency industry. Usually trading for exactly $1 a token, Tether’s market cap, which was only $360 million in August 2017, is today over $9.2 billion and implemented on 7 different blockchains. According to Decrypt, on May 25th 2020, Tether reached a record of moving $1.2 billion in one day, after transferring $212 billion worth of USDT in 2019.

Source: Aracane Research

Tether has more than doubled its market cap since March of this year, spiking only days after a massive spike in the dollar index. This hints that Tether may also be used as a substitute for dollar-denominated accounts, bought by international savers who have trouble accessing dollar banking.

Tether has created a borderless dollar market that moves instantaneously across the planet with no roadblocks. The ease of using Tether as compared to the cost and challenges of maintaining banking relationships is what made USDT the choice for so many exchanges and traders across the planet. But Tether’s existence depends on it maintaining its own link to the traditional banking system so that the on-blockchain tokens will be backed by real dollars in a bank account. According to Zhao Dong (the founder of RenrenBit and a Bitfinex shareholder), Bitfinex, the owner of Tether, invests many resources into legal work aimed at ensuring Tether’s regulatory status.

“I think the risk for insolvency is low at this moment. The risk is from the government side, not from the reserves, to my knowledge,” Dong said in a recent interview. According to Dan Matuszewski from CMS Holdings, the market does not reflect this risk. “Lending rates mirror demand for leverage and do not reflect fear of seizure. There’s not a lot of difference between interest on Tether and on cash dollars,” he said.

It may actually be problematic that markets do not price in this credit and legal risk. Although users are not as worried about Tether, it is important to consider what Tether’s shut-down or seizure could mean to your operation.

According to Sam Bankman-Fried, CEO of FTX, in an imaginary situation in which Tether goes to 0, the first thing to happen would be a temporary cryptocurrency run-up. “If USDT goes to 0, then BTC/USDT goes to infinity. You would technically see that graph diverging upwards and maybe a lot of things would pump because of that.” He went on to explain that the aftermath would be the delisting of all USDT pairs and replacement with other stable-coins, perhaps creating some fragmentation, leaving the ecosystem with a “9 billion dollar hole in it.”

Fried agreed throttling redemptions would not have a huge effect on the price. “A year and a half ago, Tether went down to 95 cents when there were issues with auditing the tether account. And it didn’t hurt Bitcoin’s price, everything was Business as usual. Even if it’s not redeemable it could be worth something.”

“When people talk about Tether risk, I think the real risk is way less likely to be that it goes to 0, and way more likely to be that it goes to 97 cents. It’s way more likely that redemptions are harder for a period and that causes a decrease in price. You’re way more likely to see a moderate scenario of tether going to 97 cents and not a full-on crash,” he concluded.

So, we are left wondering what the story really is, with a number of questions in mind: Is Tether a cryptocurrency? De-Fi? Or fiat squared? It’s stable, but potentially not a good long term store of value. It’s easy to move around the planet but has the looming danger of a centralized shutdown. Exactly how many dollars are kept in Tether’s bank account? Few know or even care, but daily transactions using it are in the hundreds of millions. Tether is a cyberpunk-dollar enjoying some of the best and the worst both worlds have to offer.


  1. India lifts cryptocurrency banking ban, Russia motions to ban cryptocurrency businesses while Iran regulates mining and exchanges.

2. Institutional arms race: Coinbase buy prime broker Tagomi, Genesis Trading start Derivatives OTC desk and buys Cryptocurrency custodian Vo1t

3. FTX May digest: Miner Position Index, Exchange inflows and more

4. Bybit’s Mutual Insurance: Portfolio Protection via Short-term Options Spreads

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