India: Why did USDT fall and arbitrage opportunities erupt?

    • Panic selling sent USDT down to INR 66
    • Arbitrage opportunities opened up on three fronts

    Stablecoins serve one purpose. They remain stable by pegging their value to a fiat currency, like the US dollar. But in times of volatility, limited to a specific region, and that specific region’s trading platforms, stablecoins don’t remain stable.

    On November 23, the Indian government proposed a bill potentially banning private cryptocurrencies. This bill will be tabled before Parliament during the Winter Session which will run from November 29 to December 23, 2021. While the status of cryptocurrencies did not change with the bill, it led to panic selling among Indian traders.

    USDT Panic Selling

    This panic selling was widely seen in the Tether (USDT) markets. Among Indian cryptocurrency exchanges, USDT is one of the most popular cryptocurrencies, based on trading volume. This is because the stablecoin is used as a base trading pair to buy several other cryptocurrencies like Bitcoin, ETH, Dogecoin, and more.

    The use of stablecoins for trading is a legacy problem. Prior to March 2020, when a ban on banks working with private cryptocurrency companies was lifted, all transfers on exchanges were through peer-to-peer (P2P) trading. Traders were put in contact with other traders to buy or sell cryptocurrencies. These traders relied on USDT as a base trading pair for all transactions. This eventually continued when the ban was lifted.

    With USDT, the main trading pair, traders would store a massive amount of the stablecoin to trade on rallies or downturns. However, when news of the cryptocurrency bill broke out, fearing their stablecoin balances were threatened, traders dumped their bags.

    This played out in traders selling their USDT below the dollar to rupee. At the time of writing one US dollar is worth INR 74.4. Since USDT is pegged to the US dollar in a 1:1 ratio, one USDT should equal INR 74.4. Due to panic selling, the value of USDT fell as low as INR 66 as traders were selling the one cryptocurrency which formed a base trading pair.

    Arbitrage opportunity

    The fall in stablecoin prices presented an arbitrage opportunity for India’s traders on three fronts.

    First with stablecoins itself. With a spread of close to INR 20, in a matter of 24 hours, those who bought the stablecoin dip could sell it for a 25-30% profit.

    Second with top cryptocurrencies. As USDT was a base trading pair to buy top cryptocurrencies, the price of the former also fell. This was despite a gain in the global price of top cryptocurrencies like Bitcoin and ETH.

    Third on foreign exchanges. Many exchanges are used as on and off ramps by Indian traders. With a massive spread not only on exchanges but between domestic and foreign exchanges. Traders bought USDT on the cheap, transferred it to foreign exchanges, and sold it for a profit.

    Aakash Athawasya
    Aakash is a market analyst at Vauld. He looks at on-chain data of Bitcoin, ETH, and the macroeconomic effect of crypto on the equity and commodity markets.

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