Tether Regains Its Peg After 68 Days
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- Price Movements: The ETH-BTC ratio spiked to its highest level in two months. Meanwhile, stETH continues to trade at a discount to ETH ahead of The Merge.
- Market Liquidity: One month after Binance eliminated BTC fees, we take a look at how this has altered market structure.
- Derivatives: ETH’s put-call ratio dropped to 6-month lows, suggesting options traders are more bullish on ether than bitcoin.
- Macro Trends: An analysis of BTC volatility shows that it surges in the hours after Fed meetings, a trend which first emerged last summer.
Written by Dessislava Aubert, Riyad Carey, Conor Ryder, CFA, and Clara Medalie
Trend of the Week
Tether finally regains its peg.
For the past 68 days, Tether (USDT) — the most systemically important stablecoin — has traded at a slight discount to the dollar. The discount first emerged on May 12th following the collapse of Terra’s UST stablecoin, which triggered widespread market panic that overflowed to USDT, causing it to dip as low as $.96 on some exchanges. In the two months since, it has consistently traded at a slight discount and averaged $0.999 in June. During this time, USDT’s market cap fell from over $80bn to about $65bn today. On July 19th, USDT finally regained its peg and its market cap has begun to stabilize.
In the weeks that followed UST’s collapse, reports started circulating that hedge funds were shorting USDT, primarily on FTX. The data confirms this: open interest (OI) for USDT-USD perpetual futures shot from $105mn on May 10th to nearly $300mn on May 12th as depegging fears spread.
OI reached an all time high of $450mn on June 30th. Since then, OI has dropped to under $300mn, suggesting that traders and investors were closing their positions as USDT came closer to its peg. This may mark the completion of a significant stress test for crypto’s most important stablecoin.
Price Movements
Markets trade flat following Tesla BTC sale.
A choppy week for crypto markets saw ether outperform bitcoin, although both assets retraced overnight giving up some of their weekly gains. Markets were hit by the news that Tesla, one of the main catalysts of 2021’s bull run, had sold 75% of its bitcoin holdings, worth $936 million. Coinbase came under scrutiny after the Department of Justice and SEC charged a former product manager with wire fraud and insider trading, notably calling nine of the cryptocurrencies involved in the case securities. Three Arrows Capital founders, Su Zhu and Kyle Davies, gave their first interview since the collapse of the hedge fund, blaming trades in Luna, GBTC and stETH for the fund’s demise.
On the macro front, the ECB raised rates for the first time in over a decade and anticipation is building for this week’s Fed meeting, where they are expected to raise rates another 75bps.
stETH continues to trade at a discount to ETH.
Lido staked ether (stETH) continues to trade at a discount to ether on Curve, which is the largest market for stETH, possessing more than 95% of total market share. stETH is issued by the Lido protocol, which is a liquid solution to Ethereum staking ahead of The Merge, allowing users to earn rewards for staking ETH while still being able to use a liquid token across various Defi protocols. While the price of stETH is irrelevant for long term investors who can redeem 1:1 directly with Lido some time post-merge, the discount meant any forced sellers during the recent mass liquidations were forced to sell their holdings at a significant discount.
However, recent bullish sentiment regarding the Ethereum network, specifically the reveal of a target date for The Merge, has seen the stETH discount decrease to its lowest levels since just before the Terra collapse. As The Merge approaches, investors seem happy to take on the short term liquidity risk that stETH presents under the assumption that they will be able to redeem 1:1 with Lido in the not-too-distant future.
For more on the stETH discount, check out research director Clara Medalie’s EthCC talk.
ETH-BTC ratio spikes ahead of The Merge.
The ETH/BTC ratio serves as a gauge as to the relative strength of cryptocurrency’s two biggest assets. When the ratio is going up it means that ETH is outperforming BTC and vice versa. Over the last week, we’ve seen this ratio reach its highest level in over two months, nearly recovering to its levels before the Terra collapse in mid May. BTC usually outperforms in bear markets as it is perceived as the safest investment in crypto outside of stablecoins and investors often take a period of ETH outperforming as a bullish indicator for the performance of smaller cap tokens.
We’ve seen improved sentiment around the Ethereum ecosystem in recent weeks as the transition to proof of stake — known as “The Merge” — finally received a target date for September 19. The Merge is expected to reduce the network’s energy consumption by 99% and should pave the way for improved scalability with the introduction of sharding at the start of 2023. Scalability and environmental impact have been two of the biggest criticisms of the Ethereum network and a successful, on-schedule transition to proof of stake should help address these issues.
Market Liquidity
An analysis of Binance market structure following the elimination of BTC fees.
It has now been one month since Binance.US first announced they would eliminate trading fees for all BTC pairs. Two weeks later, Binance (global) — the largest cryptocurrency exchange in the world — followed suit, eliminating fees for 13 BTC pairs. Despite surging volumes, liquidity as measured by the bid-ask spread has deteriorated from an average of .03bps to .8bps for the BTC-USDT pair. Binance’s BTC-USDT spreads are now comparable to that of FTX’s, with Huobi and Okex now possessing the tightest spreads across all crypto markets.
The reason for this sharp shift in market structure could be due to increased costs for market makers; shortly after the elimination of fees, the exchange excluded the 13 BTC pairs from its spot liquidity provider and VIP programs to limit wash trading incentives after BTC-USDT volumes surged to all-time highs (in native units) on July 8th. The programs offer various advantages including reduced market makers’ fees, BNB fee discounts and higher withdrawal limits.
We further take a look at BTC-USD spreads on Binance.US which also eliminated bitcoin trading fees at the end of June (Coinbase is charted for context).
Despite exhibiting strong volatility, BTC-USD spreads have remained roughly comparable to their levels before the launch of zero-fee bitcoin trading. Since Binance and Binance.US eliminated fees, both exchanges have experienced a surge in market share. Compared with the most liquid BTC-USD(T) markets, Binance’s market share has jumped from 36% to 59% while Binance.US’s market share has climbed from 1% to 3%.
When looking at the raw number of trades executed for the top BTC pairs, we can observe that the spike is ongoing.
Binance.US’s trade count climbed above FTX’s in the first two weeks of July, and trade counts are now roughly even, although FTX’s volume is still significantly higher. Binance trade counts continue to hover at all time highs. Overall, the elimination of BTC fees has been a boon for Binance’s global market share, which had already been trending upwards over the past 6 months.
Derivatives
3AC liquidated on Deribit amid legal fight.
Last week, news broke that 3AC holds a 17% stake in Deribit, the largest options exchange which is now the subject of a messy dispute over the company’s valuation. Deribit claims that 3AC owes the exchange $80mn.
Looking back, it was reported on June 17 that Deribit had liquidated 3AC’s positions (which documents revealed to be BTC and ETH perpetual futures) on the exchange in the previous week. When examining open interest in native units for BTC and ETH perpetual futures on Deribit, we can observe sharp increase and decrease in the days leading up to June 17. In USD terms, total OI for both pairs dropped from $960mn on June 13 to $650mn on June 17, though a large part of the drop can be explained by BTC/ETH price movements. This suggests that while 3AC may have had a large position on the exchange, it was far from systemically important, and the company’s stake in Deribit is still valuable.
BTC and ETH put-call ratios diverge as correlation weakens.
The Bitcoin and Ethereum put-to-call ratios has diverged after moving mostly in sync over the past year. Typically, a decreasing put-call ratio is seen as a bullish sign as demand for puts (bearish bets) are declining relative to calls (bullish bets). Ethereum’s put/call ratio has been on a downward trend since April despite spiking briefly in May and June. By contrast, Bitcoin’s put/call ratio hit its highest level since January 2021 last month, before starting to retreat in July. It has been consistently higher than Ethereum’s since April.
This could suggest option traders are more bullish on ETH as the timetable for the upcoming Merge solidifies. The trend is mirrored by falling correlation between the two assets, which suggests that the two assets outlook is increasingly divergent.
Macro Trends
BTC volatility spikes in the hours after Fed meetings.
As we enter another Fed week, we look at Bitcoin’s reaction to Fed meetings over the past two years. Bitcoin’s volatility — as measured by the absolute hourly returns — increases significantly in the hours after Fed meetings, a trend that first emerged in the summer of 2021. The trend is mirrored by BTC’s rising correlation with risk assets and demonstrates the growing impact of key macro data releases on crypto markets. Average volatility is around .5% while in 2022, average volatility after Fed meetings fell between 1–2%.
The market’s reaction to key data releases and central banks’ speakers will likely amplify further in the following months, as both the Fed and the ECB are adopting a more data-driven approach to monetary policy forsaking the so-called forward-guidance. The ECB announced a “meeting-by-meeting” approach while last month the Fed unexpectedly hiked rates by 75bs — instead of the initially telegraphed 50 bps — in the face of hotter than expected consumer price inflation data.
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Thanks for reading and see you next week!
