The problem is: the Tether-USD pairing, which is the one that is supposed to always be at 1:1, is really exotic on exchanges. The only major one coming to my mind is Kraken, and even there the volume on the pair is anemic compared to the Tether market cap.
Or at least it was this way last time I was really active in cryptos, which I‘m not really at the moment. But a quick scan of Coinmarketcap didn’t really indicate that this has changed.
The Tether:USD rate is not the only factor you must consider, particularly because of how thinly traded it is.
The more important metric is comparing what it costs to buy BTC on Coinbase with cold hard USD, and what it costs to buy and then transfer out BTC with Tether anywhere else.
If you can buy large quantities of BTC with your Tether at close to the USD:BTC rate, then you can exit your Tether holdings at or close to the effective peg.
That's sea shells being traded against rocks. For Tether not to be sea sells ( or rocks ) this trade needs to have a very low difference between X and Y:
Start send X from a bank account USD to trading spot.
Do USD->Tether->BTC
Immediately follow up with:
Take BTC received and do BTC->Tether->USD (Y) => fire to the bank account
Thank you for providing this additional context. If the pairing is exotic and doesn't have much liquidity, can you still compute the expected value of tether by doing Tether->BTC->USD? Maybe not, because maybe BTC->USD is inefficient or illiquid itself?
You can compute the market price, either by taking the USD/USDT pairing on Kraken directly or by taking the ratio of BTC/USDT on Bitfinex against BTC/USD on Coinbase. They usually give the same answer modulo exchange fees (i.e. within about half a percent or so). When there was a run on Tether in May and it dropped to about $0.93, there was roughly a 7% price premium (several hundred dollars) on Tether-based exchanges like Binance and Bitfinex.
The confusion is because in theory, the market price should be tracking Tether reserves. Bitfinex admitted in a court filing that only 73% of outstanding Tether was backed by dollars. In an efficient market, that should imply that the price of Tether would fall to $0.73. Instead, it went back up to about $1. The implication is that traders either figured Tether would somehow be able to make up the shortfall, or that it just didn't matter.
Interestingly, people who shorted Tether expecting the market to be efficient got rekt, and the people who were actually correct (so far, at least) were the ones who were irrational. I wonder what this says about rationality and efficient markets today.
> I wonder what this says about rationality and efficient markets today
There isn't an efficient market around Tether.
The exchanges that trade it are predominantly controlled by its backer. Fraud investigations in play make a short's gains at risk for clawback. (Or at the very least, creating a legal headache for their owner.)
There is no assurance that the end game isn't a crash in value, but no value, which makes closing out a short position difficult or even impossible.
I have traded securities my entire career. It's been pretty obvious, from the start, that Tether is a scam. I wouldn't short it.
Disclaimer: This is not securities advice. Don't buy or sell securities or currencies based on Internet comments.
> I wonder what this says about rationality and efficient markets today.
Nothing new. Markets are more heavily dominated by those with more resources. If these players decide to act irrationally, then you'll go bankrupt faster than they will.
This is why you don't short industries, you only short companies. Industry will eat you alive. There are also strategy and tactics. Musk can fend off the short siege even though they might collectively have more resources than he does. If you want to beat someone in the market, your better bet is to enter it yourself than to try to bet they're going to fail.
Trying to use a short maneuver to expose market irrationality is not for the faint of heart. It never was. Shorts were only ever really useful to try to profit off of stupidity, not irrationality.
Or at least it was this way last time I was really active in cryptos, which I‘m not really at the moment. But a quick scan of Coinmarketcap didn’t really indicate that this has changed.