The Tether-Binance Axis and the Great Crypto Crash of 2022

Tether Corporation is not printing USDT for the purpose of inflating Bitcoin's price, even though it often has that effect (as explained in Friday's blog). Its original purpose was to simplify exiting positions and to facilitate transfers to/from exchanges that don’t have fiat on-boarding. But tether's purpose changed completely when it became the de-facto cryptocurrency for leverage trading on futures, notably on Binance USDT perpetuals, which account for most of the crypto futures volume this year.

Tether originally stated that each USDT token was backed 1-1 with USD, to give the impression that 1 USDT is worth 1 USD, but the backing actually serves little practical purpose. Instead the "peg" to the USD is maintained by arbitrage traders scalping cents.

Even though the market knows Tether has very few fiat reserves, this arbitrage activity is what maintains tether's USD value in a suspiciously steady fashion. As soon as the value of USDT drops a fraction of a cent below 1 USD, HFT algorithms push it back up, and vice versa. This article explains the various arbitrage mechanisms (however, the author's explanation says currency is actually transferred between exchanges, whereas in reality, professional tether scalpers run multiple USD and USDT accounts on every tether exchange).

The arbitrageurs are probably Tether themselves and associates that have vested interest in keeping the peg (more on this below). If it were truly a free market we would see larger swings in the value of USDT as the market loses faith in it, especially around big news events where their fraud is exposed.

Back to my broken record.... it is not only that Tether is fraud, but also that Binance is a scam. I am not alone in believing that the entire crypto market is in a massive leverage bubble entirely due to the unscrupulous activities of both these players. Just look at this comment from one of my website followers: "I have access to 50X leverage in my Binance account. Others have more. Some exchanges offer up to 200X. I could deposit $100,000 into my Binance account, use 50X leverage, and have an open position that contains 5m USDT tokens. We regularly see 1bn USDT prints from Tether and everyone wonders where they are getting the money from, but the truth is that - using 50X leverage - traders collectively would only need to deposit $20m into Binance to get access to 1bn USDT tokens."

If you've been reading my previous blogs you'll understand that Binance orders these USDT tokens as some kind of over-collateralised loan deal, on which Tether gets high interest, while Binance profits by taking the real fiat money from traders who lose their leveraged futures bets.

Although Binance launched their futures platform in September 2019 the mobile app only became available in December 2019. At that time Binance reported that "On average, over 60 percent of traders on Binance Futures trade at a leverage of 20X or higher. Users trading at 125X leverage account for 21 percent of total traders, on both desktop and mobile." A few months later, Tether's market cap began to sky rocket (see below). There is no doubt in my mind that the increase in Tether's market cap is a result of the growing popularity of leveraged futures trading, especially on Binance.

In a year that has seen so many Tether exposés tether's lowest price was $0.9918, less than 1 cent below the dollar. But not because traders actually believe that 1 USDT is worth 1 USD, it is because Tether themselves (and probably others with a vested interest in maining the peg, such as Binance) are arbitrage scalping. No ordinary trader would have felt comfortable arbitrage scalping USDT after the NYAG report was released.

Tether is largely unbacked -- their alleged commercial paper is not even worth the paper it's written on -- and the Tether-Binance axis is fuelling a massive leverage bubble which is inflating the value of all crypto assets. When the bubble collapses, maybe even next year, the fall-out for the institutions that are herding into bitcoin like there is no tomorrow might precipitate a financial crisis even worse than the banking crisis of 2008-9.

Carol Alexander, 14 November 2021

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