Jimi Smoot


Sometimes trading opportunities seem so obvious but before you buy, it's always good to ask why.

For example, the other day I started to notice a price difference in Bitcoin on the cryptocurrency exchanges.

  • Bitfinex: $1326.50
  • Poloniex: $1327.03
  • Gemini: $1247.33
  • GDAX: $1247.57

The price difference between Gemini and GDAX is the few dollars it would cost if you were moving money between the two --therefore making a trade not profitable. This is normal.

However, the difference between Gemini/GDAX and Poloniex/Bitfinex is ~6%. If you saw this and wanted to try to do an arbitrage, you could probably net ~5% depending on volume and the fees where you enter & exit the trade. At first glance this opportunity doesn't seem too bad. For every $20k USD that you run through the trade you would net around 1 BTC.

But not so fast.

The market is very smart so the real thing to think about is why this price difference is occurring in the first place. Also, moving $20k through the crypto system (and its volatility) is a lot to risk for only 5%. So maybe there is a better trade out there that doesn't involve routing money through multiple systems.

Let's do a deep dive and find out:

Poloniex is an exchange that only trades in cryptocurrencies. Therefore, to compute the BTC/USD price Poloniex uses a cryptocurrency called Tether (USDT).

What is USDT?

The theory behind USDT is simple. A company called Tether created their own token on top of Bitcoin using Omni Layer. Then Tether holds 1 US dollar in a reserve fund for each USDT token issued. So when you open up a Tether account and deposit $100 into it, Tether holds that $100 in reserve and then issues you 100 USDT tokens which you can then take into the exchanges and trade with. Whenever you decide that you want to convert back to US dollars, you send the USDT tokens you've accumulated back to your Tether account and tell them to wire the equivalent money to your bank account.

See the Tether paper for additional details

Tether is not exactly decentralized but it's a good thesis. Things should be 1-1 since a 1 USD deposit means that you will be able to redeem 1 USDT for that dollar sometime in the future --though their terms doesn't guarantee redemption. As of this writing, however, Tether and Bitfinx are both having issues sending and receiving wire transfers in US dollars. You wouldn't know this by looking at the Tether twitter/website/etc but guess who does know.

The market knows.

Since Tether's wire capabilities are down, as of this writing, if you are holding USDT to convert back to USD you need to go to Kraken who has a market set up to sell your Tether tokens for USD. On Kraken, the market understands the problems that Tether is having and has added a premium to the price if you want to convert back to USD.

That premium is ~7%.

If you believe that Tether will get their USD wire transfer capabilities back, the trade would be to swap out the USD for USDT and hold until Tether is able to wire you the money. You would make a ~7% return.

This, however, seems like a lot to bet for a measly 7%.

Regardless, it seems that the market believes that Tether has become slightly less Tethered. I wonder how much more the price will slide each day that the wire capabilities are down.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.