A jittery market is miscalculating at least one number. The Fear Greed index appears to be registering a little bit on the high side.
Clocking in at “12” would suggest that the market is less fearful now than the relatively pedestrian crash back in January of this year, when the Fear/Greed index hit as low as “10”.
The level of panic I’ve seen on display around the ecosystem in the past week is far more acute than January. The fear feels more like the sudden crash of May 2021, and arguably even more severe.
Markets offer you few such opportunities for such perfect clarity. When times are good, it’s often difficult to tell which personalities have actually “made it” and who is merely LARP-ing as rich. People panicking now are letting their poker face slip and revealing their exact net worth. Take note and remember this, you won’t get such a clear signal when times turn good.
If this concept is new to you, then we do have advice for you (life advice, not financial advice). With stablecoin FUD at a peak, the safest place for you to park $10 / month is in the Bow Tied Bull Substack, which elaborates on this point in their latest paid post.
Tether FUD
We thought Tether FUD had finally disappeared for good, but it turns out Tether FUD is more eternal than death, taxes, and “China bans Bitcoin” FUD — which may again make a cameo this year....
Following the collapse of UST, people are afraid of further stablecoin collapses. Most notably, users are fleeing Tether across the ecosystem, pushing it as far below peg as it has seen in some time.
The sudden Tether panic is causing some irrational trades.
The beneficiary of the panic is USDC which spiked as high as $1.06 and still trades at a premium as liquidity is getting drained.
As with all things crypto, anything is possible. Tether may collapse against all odds. Nowadays, “black swan” events seem to happen nearly every quarter, so we understand why investors are concerned.
If you are nervous (aka not secure financially) and want to flee Tether, at present you will have to pay a very slight premium to trade Tether for other “stablecoins.” Since it might only be a few cents for shrimp, you might be willing to eat the loss for peace of mind. If you are making this move, fine. One can never be too cautious.
Just know that rich people are laughing at you. Cheap Tether means rich people have the opportunity to execute the following move at present:
Deposit $1MM USDC to Curve 3pool, receive $1.01MM Tether
Go to Tether’s website, cashing out Tether normally at 1:1
Receive $10,000 profit
This action is only available to users who are able and willing to KYC themselves at Tether’s website, and we presume there’s some minimums and fees involved that make this better for rich individuals.
Why is it not repegged already then? We are speculating here, but if $300MM has been redeemed in the past 24 hours as Paolo reports, then we’re guessing some whales are already cashing in on this opportunity. It just happens there are more panicky users than smart whales at the moment. Your panic is their opportunity.
We’d also guess that a bonus $10,000 per $1MM is nice, but not sufficiently exciting to motivate whales to move swiftly. If you want to pocket a quick $1MM, you’d need about $100MM in USDC available. If you have $100MM sitting around in USDC for some reason, you’re probably already earning good enough interest yield farming it somewhere that you prefer to keep these yields uninterrupted. If you have $100MM, is an extra $1MM worth the hassle?
What do we mean by “hassle”? If you execute the above maneuver, you now have $100MM in dollars sitting in the traditional banking system. If you want to get back into USDC, you now have to move $100MM through the TradFi rails to, say, Coinbase. In a few days when the money clears on Coinbase, you can market buy $100MM USDC at a 1:1 rate. The TradFi rails may also carry additional banking fees, and possibly get held up longer for review, perhaps you need to pay the accountant extra, etc. A hassle!
Nonetheless, we expect in this otherwise tough market, plenty of whales will eventually grab the free money. As a shrimp, the opportunity may not make sense though. Yet another reason life is always better for the wealthy.
Tether vs. UST
The Tether situation is quite different from the $UST collapse. $UST could not process redemptions when stressed because the money was imaginary — at least, more imaginary than most money. Tether, meanwhile, claims it has the majority of its reserves in US Treasuries.
If true, a run on Tether would end up passing through Tether and hitting the US Financial system. A run on tens of billions worth of treasuries would leave a mark. According to SIFMA, $679.1 billion ADV in treasuries are trading daily, which by my mental math means a run on Tether could hit about 10% of this (macro chads can correct me in the comments).
Ergo, a run on Tether would flow upstream and damage the US financial system. To be fair though, if the US financial system gets hit, your bripto bags would bleed too.
Now, Tether FUD-sters have long claimed Tether is simply lying about their holdings. Possibly true. However, these FUD-sters have been making these claim for years now. These claims have been scrutinized by US courts already, which were settled with the NYAG for $18.5MM with no charges brought.
Your mileage may vary here. Our interpretation here is that the burden of proof for any claims that “Tether is unbacked!” now falls onto the FUD-sters. We believe if the courts had uncovered significant evidence Tether was not backed, the resolution of the case would have been quite different. Amazingly, Tether is entering “systemically important” territory.
The most credible FUD we can imagine now is that USDC, now operated in part by Blackrock, is able to convince regulators to sabotage a competitive token. It’s tough here to imagine regulators would do so given the aforementioned systemic risks to US Treasuries, but regulators have proven unwise before.
But whatever, this ambiguity is why liquid markets exist. If you buy into the Tether FUD, you are welcome to trade your convictions. Maybe you know better than the person who wrote this.
One play I’ve heard traders make at the moment is to open a short position on Tether. If Tether repegs, you would theoretically lose very little. If Tether depegs severely, you could buy yourself some degree protection. Of course, if Tether depegs, we may enter into such strange territory in DeFi that you have other problems. I’ve not spoken with a financial advisor about this strategy, so you should not engage in such a risky maneuver without a more thorough evaluation of the risks and rewards.
Curve 3pool
So what about Curve? Many observers have noted the 3pool is growing imbalanced in favor of Tether.
In some cases, users are sharing 3pool’s balance in order to spread FUD. We presume they are low net worth.
Some notes about 3pool here. The 3pool has a very high A parameter (5000), which means that 3pool will consider 1 USDT to be very close to 1 USDC right up to the very edge. The pool is operating exactly as intended: willing to accept larger imbalances without severe price impact due to the strong likelihood of the pool regaining peg.
In other words, the practical limit of the pool is the amount of DAI and USDC available in the pool. In the global rush among panicky degens to collect these coins, the pool has about $300MM of the supply left. This means users can still make trades up to these amounts, although as the size of the trade approaches this limit, the price impact will indeed become more severe.
Whales looking to cash out amounts in the hundreds of millions may prefer to go to Tether’s website and redeem 1:1 instead of the 3pool. Smaller trades can continue using the pool, but will have to get $0.995 on the dollar, not a terrible rate. This will last until enough users mint USDC (or DAI) and deposit into 3pool to claim their deposit bonus. However, the market is still fearful and gas fees are quite high, so this opportunity may not be claimed for a bit.
I’d argue the state of 3pool accurately reflects the current state of the market. As usual, in times of panic, liquidity is restricted across most other sources. Curve alone remains functional, serving as the only reliable market through thick and thin.
For what its worth, the people panicking about 3pool tend to be random users on Twitter. Per the BTB heuristic, they are signaling that they are poor and you should record this in your notes. I actively follow several Curve channels. The mood of the Curve team is not panic, but jubilation. Perhaps this signals they have a high net worth.
In fact, the Curve team are mostly celebrating the record shattering daily fees. Yesterday fell just short of the memetically important $6.9B marker. Before the market dip, Curve was in the process of moving the 3pool fee from 3 bps to 1. Fortunately for veCRV holders, this hadn’t taken effect yet, so the panic trading of 3pool earned about 3x the normal fees.
The biggest knock against Curve I’ve observed this week has been that it’s socially tone-deaf for Curve to celebrate record fees amidst the backdrop of so much pain in the cryptocurrency markets.
Personally, I find Curve’s occasional celebrations during bear turns to be quite reassuring. But I’m also socially tactless, so I’m a poor judge of whether Curve’s gloating is insensitive.
Token fees are important because without such fees, the token could fairly spiral to $0. Especially when bear markets roar, trading fees take on additional importance, serving as something like a floor price that gives it some resilience relative to unbacked DeFi tokens.
I also happen to be in the camp that locks every $CRV, so price movements of the coin also feel quite irrelevant. Perhaps if I had a day trader’s mindset I’d also be more concerned about market turmoil. From the looks of it, the median $CRV user has a staker’s mindset and not a gambler’s mindset.
Elsewhere in Stablecoins
As users panic about stablecoins, what is the state of the other popular algorithmic stablecoins?
$LUSD is fine.
$FRAX is fine.
Broadly speaking, most pools are fine.
The $USDN pool is struggling a bit, but this pool has always been a bit dodgy.
If there is one pool that is worth keeping an eye on in the turmoil it is stETH
A stETH depeg would not really be a true depeg. It would require bagholders to wait until the merge to redeem. This may not affect everybody, but people have varying time preferences. LIDO is becoming systemically important to the Ethereum ecosystem, so if you want to FUD something this is a better candidate.
Or if you really want something to panic about…
Disclaimers! This is all intended to be educational, not financial advice.