How to Prepare for the Next Tether Price Crash
A “gray rhino” refers to a probable, high-impact-yet-overlooked threat. The latest gray rhino event in the crypto world was the price collapse of USDT, the currency issued by Tether. USDT is supposed to be pegged to the US dollar, but its value fell to $0.87 on October 15. So what should a crypto trader do next? Data offers some clues.
The importance of USDT in the crypto world
USDT is the bridge between fiat and digital currency investment, and the best-known stablecoin with the largest volume. Its importance to blockchain investment is self-evident.
USDT’s market volume has steadily increased to over $2.5 billion since the beginning of 2018, and it is currently ranked the 8th biggest coin by market cap on CoinMarketCap.com (pictured above).
As shown by the above data from cryptocompare.com, USDT/BTC transactions account for 49.82% of the total trade volume of Bitcoin, while USDT/ETH transactions account for 36.21% of Ethereum’s trade volume.
What about other stablecoins? According to blockchain data, the top five stablecoins have a total market cap of US$308 million, equivalent to just 10% of the total value of USDT ($3.08 billion).
What happened when USDT crashed?
Let’s review what happened when the USDT crashed on Oct. 15, using Binance data tracked by tradingview.com. The above chart is a trend comparison of the trading pairs of USDT against BTC, TUSD and PAX. The fall of USDT’s price started on Oct. 15 US time. Funds began to flow from USDT to Bitcoin and other stablecoins such as True USD (TUSD) and Paxos Standard Token (PAX).
The price of BTC rose 17% against USDT, while TUSD and PAX rose 17% and 12% respectively. After that, the market gradually came to its senses and those prices began to fall again. As of press time, both TUSD and PAX all fell back to the level of a 4% to 5% premium against USDT, close to where they were before USDT plunged. However, BTC’s price premium hasn't come down as much; it's still 7% higher than it was before the collapse of USDT.
We can observe from the above chart that funds hedge against a USDT crash by putting their money in Bitcoin. Furthermore, PAX, TUSD and other stablecoins cannot fill the gap brought by USDT’s collapse.
How to Spot the Next USDT Price Crash
Longhash’s Live Charts track the relationship between the USDT premium and Bitcoin price. The USDT price premium refers to the percentage by which real time USDT prices on exchanges exceed (or falls short of) one US dollar. A large positive USDT price premium tends to precede a rise in the price of the Bitcoin. Meanwhile, a negative price premium may signal a fall in Bitcoin prices.
It’s worth noting that since October 7, the negative premium rose by over 2%, eventually evolving into the crash of USDT. If you consciously tracked the changes in the USDT price premium, you might have been able to prepare for the plunge in advance. We believe that after this recent crash, the premiums of various stablecoins will become an important indicator as well.
What to do after a price crash
Most investors may be more concerned about how to protect their funds when the USDT collapses than about understanding the concept of stablecoin value. Considering that the price of USDT may remain in fluctuation over the short term and other stablecoins are still unable to fill the gap, it’s worth thinking about how to prepare for the next crash.
Here are a few tips:
Convert to fiat: The safest approach is to exchange your USDT for dollars or other fiat currency. In China you would have to do this via an over-the counter market, which means that you may have to do it in advance.
Convert to other stablecoins: Since the stable currency has become a hot topic this year, the number of stablecoins has increased. But there are still several problems: 1. Stablecoin trade volume remains small; 2. They have insufficient liquidity 3. There are not so many trading pairs and most important 4. Stablecoins are not necessarily more stable.
Convert to Bitcoin: Considering the problems of other stablecoins, converting USDT to BTC might be your safest choice.
Arbitrage between coins: In extreme market conditions, due to different premium rates, there may be an opportunity for triangular arbitrage and cross-market arbitrage among trading pairs against BTC, ETH, USDT, PAX, TUSD and other coins. However, as these trades need to be done in real time, you will need teams with quantitative analysis.
Wait and See: When you open your computer and find that USDT is in an abnormal situation, quietly waiting for a price correction is also an option.
Buy when there is a negative premium: If you believe that USDT is not in danger of a crash, you may also buy USDT when there is a large negative premium, and sell when the negative premium is reduced to arbitrage. Or, you may transfer your USDT into Bitfinex and then withdraw the USD, but this requires you to pass the KYC verification of Bitfinex.
After two-day adjustment, the premium of USDT seems to have stabilized, but the story isn’t over. Make sure you’re ready for the next crash.