Tether, the largest dollar-backed stablecoin, penetrating almost every corner of the cryptocurrency market, is back in the news and for unfavorable reasons.
Permanent bears who are concerned that the lingering tether (USDT) the scare would eventually culminate in a money break that could now be seeking the cryptocurrency market equivalent of a credit default swap, a derivative instrument that allows buyers to bet on the creditworthiness of another trading counterparty.
The answer to that could be a put option on tether, essentially a bet that the stablecoin’s price will fall below its ostensible $ 1 trade value. Some traders have been actively looking for that kind of trade, according to some. players in digital asset markets.
“We continually have inquiries about tether put,” said Rich Rosenblum, co-founder and president of institutional market maker GSR Markets.
Once an academic question, the question of how to bet against Tether is getting a new boost from a report On Monday the US Department of Justice is investigating the stablecoin issuer for possible bank fraud. So far, the token, which plays a crucial role in plumbing the $ 1.6 trillion crypto market, has maintained its link with the dollar. Tether described the latest report as “repackaging outdated claims as news.”
A put option gives the buyer the right, but not the obligation, to sell the underlying asset at a predetermined price on or before a specified date. A sell buyer is implicitly bearish and pays a premium or compensation to the seller for offering insurance against a price drop.
Traders asking for put options with tether are essentially looking to hedge against the loss of the 1: 1 peg to the US dollar. Tether maintains a peg to the dollar, which helps buyers avoid the volatility risks associated with other cryptocurrencies such as bitcoin. USDT has been used extensively to fund cryptocurrency purchases in the past 12 months, as evidenced by the six-fold increase in its market capitalization to more than $ 60 billion.
What makes tether controversial is the persistent lack of transparency about the reserves that back it and the growing regulatory concern regarding stablecoins in general.
“Since the inception of the Tether foundation, there have been market participants who question the reliability of the stablecoin,” Chris Dick, a quantitative trader at B2C2, said in a Telegram chat.
Some are concerned that the stablecoin is not fully backed by liquid reserves and that the dollar peg will break if there are massive redemptions, leading to a crypto equivalent of a bank run. That is a situation where clients start withdrawing money from a bank at once, leading to the insolvency of that institution.
The market could face a severe liquidity shock if traders lose faith in tether, analysts at JPMorgan said earlier this year. Therefore, it is not surprising that there is some demand for put options on tether. However, meeting that demand is easier said than done.
Currently, there is no active market for put options on tether. Exchanges do not find a business case there as there is technically no exposure to offset. Traders do not make bullish or bearish bets on tether as they do with other assets. It is a stable coin that is bought with the confidence that eventual refunds will return an equivalent amount of dollars and is used to finance purchases of cryptocurrencies.
Participants who fear a belt collapse should find a vendor for sale in over-the-counter (OTC) markets or approach market makers. That is a costly business.
“Because there is no active market for USDT options or even bitcoin options with tether as a bargaining chip [BTC/USDT], a dealer who sells a USDT put option cannot hedge short exposure, ”said Chris Dick of B2C2. “This risk is naturally reflected in the premium paid for a USDT put option.”
Market makers and traders are on the opposite side of traders and investors and generally run a neutral direction portfolio. For example, a market maker selling a bitcoin put option is exposed to a possible price drop and could protect himself by selling bitcoin on the spot or futures market.
If that option is not available, the market maker could demand a higher compensation or premium from the buyer to justify entering the trade.
According to GSR’s Rosenblum, high cost has played a killjoy role to date. “The price is too expensive for most buyers,” he said.
The solution may be to negotiate a tie at a much lower price or out of the money below $ 1.00. That would cost relatively less than buying a put option at $ 1.00.
For example, if a fund is looking to hedge against a total Tether base collapse, it would probably choose an out of the money strike, perhaps a price of $ 0.50 per USDT. That would help keep the fund’s premium low, but it would pay off handsomely if the hearing takes place.
B2C2, being a liquidity provider, does not have an opinion on tether, but is ready to offer pricing and other hedging solutions.
“Any fund manager looking to take this position should consider borrowing USDT from B2C2, secured in any currency of their choice,” said Dick. “This would allow them to sell their borrowed USDT, giving them a short position that would benefit from a decline in USDT / USD.”
Tether put, a bearish bet on the entire market?
According to Kaiko Research, the trading volume of bitcoin-tether is magnitudes greater than the volume of bitcoin-dollar. Therefore, there is a fear that instability with the tether bonding could cause panic throughout the market.
Binance remains the world’s largest cryptocurrency exchange by trading volume despite the recent regulatory crackdown, a sign that traders continue to access their predominantly denominated markets with ties. Stable currency is also widely used for yield harvest in decentralized finance protocols.
Therefore, buying a put option on a tether option would essentially mean placing a bearish bet on the entire crypto market. That is a factor to consider for the buyer.
“If USDT were to drop substantially, it would probably be a time when the crypto market as a whole is taking substantial losses,” said GSR’s Rosenblum. “Buyers of USDT put options should be cautious about what the credit environment would look like if the put options are paid.”