Notes 3/29: Bitcoin Price and TUSD

Bitcoin price continued its gravity-defying trajectory today, rising by 5.2% in the last 24 hours, to $28,457.20, as of this writing. According to CoinDesk data, the cryptocurrency is up by 72% so far this year. This past quarter marked its biggest quarterly gain in the last two years, the publication noted.

Bitcoin’s latest price trajectory indicates that it has shrugged off the latest attack on the crypto ecosystem by regulators. The Commodities Futures Trading Commission (CFTC) filed a case against Binance on Monday alleging that the crypto exchange willfully evaded existing derivatives regulations to service its customers in America.

Binance is the world’s biggest exchange by trading volume and accounts for the biggest trading positions in bitcoin. Even though traders have withdrawn almost $1 billion from Binance and $322.3 million worth of liquidations – both long and short – of the cryptocurrency have occurred at various exchanges since the news broke, bitcoin price continues to move upward.

A Baffling Price Movement

The price movement is as mysterious as it is baffling. Liquidity in crypto markets is at a ten-month low, according to research firm Kaiko. It will decline further as incentives for the two constituents responsible for bitcoin’s price – retail investors and institutional traders – are fast drying out.

A regime of rising interest rates by the Federal Reserve in the last year has already swung the investing pendulum away from risky assets like bitcoin towards safer instruments like government securities. Meanwhile, inflation is further tightening the screw on consumer investing habits.

According to WalletHub, a consumer finance website, the average household’s credit card balances this past quarter was $9,990, up 9% from the fourth quarter of 2022. A string of lawsuits from regulators has ensured that they will think twice before running up further debt through investment in cryptocurrencies.

A Network Readjustment

Bitcoin’s technicals have readjusted to the new equilibrium.

The difficulty of the cryptocurrency’s algorithm used to mine it has remained high after March 22, when bitcoin price touched a monthly high of $28,792. But the number of systems participating in bitcoin’s network – a measure also known as hash rate – has declined over the same period. The brute computational force of many systems is required to mine bitcoin. The combination of higher difficulty and fewer resources means a reduction in the number of Bitcoin.

One could, of course, argue that the supply is being calibrated to match low liquidity conditions in the market. However, fewer participants in a trading environment laden with regulatory risk does not bode well for price action or for the cryptocurrency’s future.     

TrueUSD Takes Centerstage  

Binance recently reinstated fees it had earlier abolished for all stablecoin trading pairs, except for TrueUSD (TUSD) – a stablecoin token that trades against Bitcoin. The exchange lost market share to competitors, according to research firm Kaiko, and liquidity for stablecoin trading pairs, except for TUSD, crashed.

Change in Trading Patterns

Binance, as I never tire of mentioning, is the world’s biggest cryptocurrency exchange by trading volume. That gives it a significant say in determining crypto’s winners and losers. Until this past January, TUSD had a market capitalization of $844.1 million. Thanks to the lift from Binance’s move, it now stands at $2 billion.

A more important change has occurred in its trading patterns. Earlier, its most important trading partner was controversial stablecoin Tether. The TUSD/USDT trading pair accounted for 69.12% of all trades. The stablecoin’s trade with bitcoin was a measly 3.76% of all its trading volumes.

Binance’s sleight of hand in promoting the stablecoin means that TUSD is now heavily traded against bitcoin. Bitcoin liquidity for the TUSD shot up by 250 percent in the aftermath of Binance’s move. As of this writing, bitcoin accounts for 72% of all trades involving the stablecoin. The USDT/TUSD combination is now at roughly 20%.

A Stablecoin Cut from The Crypto Cloth  

In a regulated trading ecosystem, the shift in trading patterns, from an infamous stablecoin headed by Inspector Gadget’s creator towards another coin, should make bitcoin trading safer.

But TUSD is part of crypto. That means it reeks of the ecosystem’s antics. The stablecoin claims to be regulated but does not provide much detail beyond that blanket assertion.

The terms of service for TUSD also contain these gems:

We reserve the right to deny access to the Platform to anyone or cancel an account for any or no reason,

The Company itself does not guarantee any right of redemption or exchange of TrueCurrency tokens for fiat currency.

Dubious Attestations

TUSD claims to hold sufficient reserves to back its circulating supply and produced two attestations earlier to back up its claims. Those attestations came from Armanino LLP., the same firm that ‘audited’ bankrupt exchange FTX. [The firm was also sued in a class action lawsuit filed against FTX last November].

After a pause in its attestations during the pandemic, TUSD resumed them this morning. The imaginatively-named “The Network Firm” has taken over attestation duties. The Network Firm consists of a group of accountants who moved away from Armanino to start their own outfit in Miami’s sunny climes.

In keeping with the spirit of crypto attestations, the report provides scant detail about the nature of TUSD’s reserves or on the banks, which are spread across U.S., Hong Kong, and Bahamas, holding them.

Apart from treasuries, the reserves also consist of “short-term, highly liquid investments of sufficient credit quality that are readily convertible to known amounts of cash.” This perplexing description could mean a number of things. Commercial paper, perhaps? Or securities of a dubious nature?

Oh, and by the way, the Hong Kong institution responsible holding TUSD reserves also “invests in other instruments to generate yield.” We already know about the incestuous dealings within crypto. This might be another instance.

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