Bitcoin Arbitrage and the USD Tether Sell Off : Why and How it Happened

Brief

Bitcoin has been extremely volatile in the last week or two. Despite yearly volatility being at an all time low since Bitcoin’s first ever listing on an exchange, this week a saw a huge amount of price fluctuation in the markets. Predominantly, it was seen as a Tether sell off by the whales, but it the price differences have remained divergent on various exchanges. A link between all of this can definitely be seen, but not many people truly see it

Why Did Tether Crash and Bitcoin Pump?

The Tether sell off came in the wake of a collective effort by large traders to discharge all the Tether in their portfolios. Where did it all come from, you ask? When a trader with somewhere between 5 and 1000 (ranging from an affluent speculator to a loaded whale) Bitcoin decides to trade the market, where do they park their speculative gains? Turning into USD is a slightly time consuming process and the same money, even though now in a stable ball park, may not be quickly accessible for the next trade. For this reason, Tether Limited and Bitfinex decided to introduce ‘crypto dollars’ to help park gains but keep Bitcoin liquidity strong. The problem that arose with aficionados and traders was whether Tether Limited had sufficient USD reserves to actually back the Tether Dollar. If each USD Tether was not backed by one real US Dollar, there would be no value in Tether and it would quickly turn into a coy plot to provide crypto liquidity and not actually have it backed when withdrawals were initiated. Sadly, this is exactly what the reality of Tether is like.
From my perspective, the October 15 pump and dump was the work of Whales on Tether supported exchanges like Bitfinex, Kraken, and IDAX. It was an orchestrated and collective effort by a group of huge traders to hit the first nail in the coffin for Tether. They sold all their Tether for Bitcoin, pumping the price in an inorganic manner, before the short orders set and being placed knocked in back down from the lack of demand at the peak ($7500). Kraken in fact, the only exchange with a USD to USD Tether pair, saw so much demand for USD compared to Tether that the price of Tether fell to $.84. This is definitely not the way a stable coin is supposed to act. Falling 16% in value is not an attribute of a good stable coin. The unfortunate circumstance here is that the Whales have fled Tether and left the smaller retail investors to rot in the foul stench on unbacked US Dollars. Despite this, it is highly unlikely that Tether is going anywhere for the near future.

Arbitraging Bitcoin

Bitcoin arbitrage opportunities arrived because of this. At the time of writing, Bitcoin trades for $6396 on Coinbase Pro and $6541 on Bitfinex. That’s a 2.2% difference in the price of the same asset at the same time. It is absolutely ridiculous to the blind eye and any sane person would question how such a situation could persist beyond a few minutes.
The price difference is due to the sell off of Tether alone. Tether is predominantly traded on three exchanges; Bitfinex, Binance, and IDAX. The highest volume looks like it’s on IDAX from a quick look at CoinMarketCap, but don’t let that fool you, Bitfinex has very intricate ties to Tether and has proved itself as an entity that cannot be completely trusted. The Tether pump on exchanges where the stable coin trades reached heights it did not on other exchanges. But upon looking at the price action, thinking it was a legitimate organic pump, traders on other exchanges flooded orderbooks with buys and long future contracts. This led to a price pump on these exchanges, but not to a magnitude seen on Tether traded exchanges. Once news broke that it was just a Tether sell off, the short and sells took over and price decline. For obvious reasons, price didn’t fall as much on Tether traded exchanges as small amount of Tether sales happened throughout. This kept price above the level of other exchanges and has kept the significant difference in price constant since then.

Conclusion

Even on August 22nd, the price of Bitcoin was incredibly volatile touching $6800 and $6250 on the same day. This was attributed to ‘crazy’ volatility at the time, but nobody noticed the market cap and supply of Tether drastically increased. It shouldn’t be a surprise to anyone that there are certain private players working alongside shady organizations like this in order to obtain personal gains. So the Bitcoin arbitrage opportunity you see is a legitimate one, fuelled by loss of confidence in a company running a USD backed stable coin that refuses that have an audit of its real USD balance. This price gap should end up correcting itself within another few weeks, but there is an off-chance it doesn’t, and if this arises, it will be simply due to an array of factors that will be covered in detail, here on @reverseacid, if that situation arises. Till then, be wary of everything. In a space so small and infantile, there are bound to be players who do either do not play by the rules or try to bypass it to make a quick buck. Cryptocurrency is here to stay so keep your eyes peeled and do your part to keep your own and other people’s hard earned money safe.