Notes 12/14: Tether Bumps Up Bitcoin Price, Tether Shorts, and SBF Drama

After mostly vegetating in the $16,000 to $17,000 range for the last month, bitcoin price sprang to life yesterday.

Yesterday’s announcement of lower-than-expected reading of inflation figures was said to have boosted the cryptocurrency’s price. The positive sentiment has carried over to today and bitcoin broke past the $18,000 barrier for the first time since 8 Nov.

As of this writing, it is changing hands at $18,136.75, up 2.15% in the last 24 hours based on data from CoinDesk.  

An Engineered Price Increase?  

On the face of it, bitcoin price has remained resilient amidst turmoil in crypto. It pushed upwards even as FTX’s cofounder Sam Bankman-Fried was arrested in Bahamas and a Congressional hearing detailed the fraud at his exchange. Bitcoin price also ignored fears of the FTX contagion spreading to top names in crypto like Binance and Tether.

As with everything else in crypto, however, appearances are not always as they seem.

Binance, the world’s top cryptocurrency exchange by trading volume, may have engineered the price increase by favoring one stablecoin over another.

Tether Bumps Up Bitcoin Price  

Binance halted withdrawals of stablecoin USDC for approximately eight hours on Monday. That action constrained USDC supply in the markets, making it difficult for traders to use the stablecoin for their bitcoin trades at other venues. [Binance does not offer the BTC/USDC trading pair].

Meanwhile, controversial stablecoin Tether announced yesterday it ‘helped’ Binance conduct a chain swap by moving $3 billion worth of USDT – its stablecoin pegged to the US dollar – from the exchange’s cold wallets on the TRON blockchain to its wallets on Ethereum, the world’s second most valuable blockchain.

This simple transfer of funds from one wallet to another inflated USDT numbers at Binance because the exchange supports Tether’s ERC-20 token, which is available on Ethereum.

Not surprisingly, volumes for BTC/USDT trades at Binance spiked suddenly. A similar thing has happened for the trading pair between Bitcoin and Binance USD (BUSD) – Binance’s stablecoin.

Together, the two pairs are the biggest contributors to bitcoin markets, accounting for roughly 20% of all trading volume in the cryptocurrency based on data from Coinmarketcap – a website owned by Binance.

Will Bitcoin Price Rise Further?

The chances are unlikely. Investor fears about crypto’s shaky foundations are at their peak. The chances that manipulation will bump up prices over a sustained period are slim.

In the current case, they are close to zero because both parties involved in the transactions are candidates to be crypto’s next big casualty. Previous research has implied that Tether, which is used as a connecting rail between different exchanges, is used to create boom and bust cycles in cryptocurrency markets through inflation and deflation of its supply. Binance’s international operations are being considered for criminal complaints by the Department of Justice.

Tether, Tether Everywhere

The Binance shindig was not the only appointment on Tether’s calendar yesterday.

Its management also stated its plans to reduce the percentage of secured loans in the stablecoin’s reserve collateral down to zero by March 2023. The announcement was in response to a Wall Street Journal article that detailed how Tether has begun lending its coins out to investors. The article questioned the quality and liquidity of assets it uses as collateral for the transaction.

Under other circumstances, Tether’s assurance might have been welcome. But these are extraordinary times in crypto. Tether’s reserves will continue to remain a big question mark in crypto until it commits to a comprehensive audit.

This far, the stablecoin has produced attestations or snapshots of its reserves on an infrequent basis. But those snapshots are useless because they can be easily manipulated by commingling funds and moving them between bank accounts on the day of attestation.

Shorting Tether

And so, hedge funds are reportedly shorting the stablecoin. A Bloomberg report mentions Fir Tree Capital Management and Viceroy Research as funds that are taking a short position against the stablecoin. Their bet is that the world’s biggest stablecoin will lose its 1:1 peg with the US dollar.

Tether’s loss of peg is an opportunity for institutions holding the stablecoin to make money by redeeming it for a dollar. That is the theoretical promise.

But there are many obstacles to redeeming Tether. For example, it has minimum amounts for fiat withdrawals and charges a redemption fee of the greater of $1,000 or 0.1%. It also has an account verification fee of $150 and there are very few venues, read exchanges, where one can redeem Tether.

Institutions shy away from holding Tether for long periods of time and, instead, use it to quickly get in and out of trades. Its parent company’s problems – from lack of regulation to unverifiable reserves – that the stablecoin an untouchable asset.

Ordinarily, the profusion of red flags should be ideal territory for short traders. But shorting Tether is an expensive proposition and there are no credible counterparties willing to take the trade’s other side.

Before it declared bankruptcy, FTX offered Tether perpetual futures to short the stablecoin on its platform. Embattled lending firm Genesis was another party willing to act as counterparty to the trade. Bybit seems to be the only place which has a shorting facility against Tether for traders. And the exchange, which is banned in the United States, is hardly credible.

Good luck to Fir Capital and Viceroy Management in their attempts to short Tether.

SBF Drama

Sam Bankman-Fried’s arrest in Bahamas prevented his appearance at a Congressional hearing yesterday. But there was plenty of drama in a Bahamas court room. His mother “audibly laughed” when her son was referred to as a fugitive.

Bankman-Fried asked for permission to take off his shirt and wear an antidepressant patch. He was denied bail and is set to spend Christmas and New Year in a correctional facility in Bahamas.

Back in Washington D.C., there were no surprises in FTX CEO John Ray III’s Congressional hearing. He repeated details that are mostly known, thanks to a steady drip of revelations in publications, and called the exchange an “old fashioned embezzlement”. He also said that more than $7 billion remained unaccounted for in its accounting books.

An Unprecedented Case

On BBC’s World Business Report, Tom Vartanian, Executive Director at Financial Technology & Cybersecurity Center, said that resolution of the case will “take quite a while because it is unprecedented in nature.” He also pointed out that FTX’s filing was about reorganization through Chapter 11 and not liquidation, meaning the exchange’s customers will not be made whole immediately.

At the end of the day, he said, the FTX case is all about whether assembling a balance sheet for the exchange and figuring out whether they have a viable operation. “What is the value of the company?” he asked, by way of explanation.

Right now, it is nada.

Turbulent Times Ahead

Binance CEO Changpeng Zhao has warned his employees of “turbulent times” ahead. That turbulence might become an industry-wide thing, considering Binance’s perceived size. The world’s biggest exchange has 357 coins and 1428 trading pairs on its platform. It claims to have trading volumes greater than that of NYSE, LSE, and TSE and is home to the world’s most successful venture fund. Not only this, Binance derives a substantial portion of its volumes from Tether – a stablecoin that seems to grow more impossible in its appearance and operation each day. CZ’s exchange will, probably, cause that turbulence.

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