16 May 2022
Tether’s peg got challenged last week – Peak irrational marketsDuring Thursday’s sell-off, Tether traded at lows of $0.945 on FTX – a clear signal of peak irrationality and chaos in the market.
Source: Tradingview (FTX, Coinbase)
The UST de-pegging last week had second-order effects on the market. Suddenly, Tether began trading at substantial discounts to the $1 peg as the fear reached peak irrationality.Tether has always been accompanied by wide skepticism by a subset of the crypto community. However, it’s essential to be aware of the difference between UST and USDT. Tether is backed by money market instruments, similarly to USDC, with an active redemption mechanism in stark contrast to USTs algorithmic price peg mechanism. In the chart, we show the average hourly low/high spread by day in Tether. Large deviations in the USDT price from the $1 peg are mostly affiliated with periods of extreme market stress and liquidations – i.e., periods with lots of arbitrage opportunities. The Tether discounts on Thursday created attractive opportunities for funds with access to Tether redemptions, likely leading to Tether’s declining market cap. USDT has since returned to its $1 peg.