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6 June 2023
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Tether strongly correlates with future returns on major crypto pairs

Tether remains the most controversial stablecoin in the cryptocurrency industry. When the whole market crashed to extremes lows, it was Tether, whose supply grew as it climbed all the way up to position itself as the third-largest crypto by market cap outpacing XRP. The pace at which USDT was minted over a period of the last six months gave rise to several market manipulation theories despite the operators maintaining that it was primarily due to the rise in demand for it.

According to a recent report, USDT is a very popular way for Chinese crypto investors to enter the market with most exchanges offering a range of OTC options. In addition, there is a growing demand for stablecoins from China’s over-the-counter [OTC] brokers. However, Tether is not mined and it becomes even more contentious when there is a less transparent consensus mechanism on its issuance.

The primary motive of a cryptocurrency trader to hold Tether or any stablecoin for that matter is conversion and trade with other cryptocurrencies within exchanges that do not accept fiat. With such a tight operational link between Tether and cryptocurrency trading, it is also possible to have a strong relationship between stablecoins deposits and withdrawals and the dynamics of the prices of cryptocurrency.

According to a recent study titled, ‘Stablecoins and Cryptocurrency Return: Evidence from large Bayesian VARs’, Tether significantly correlates with future returns on major cryptocurrency pairs, conditional on trading volume. The paper attempted to determine the relationship between the returns on stablecoins and major cryptocurrency pairs within the context of a large Bayesian Vector Autoregressive [BVAR] model with a global-local hierarchical shrinkage prior. The paper further concluded,

“As a matter of fact, a simple trading strategy based on a long-short portfolio generates significant outperformance with respect to naive, commonly used, investments in the cryptocurrency space such as an equal-weight portfolio and a buy-and-hold position on BTC.”

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