Economics

Sold KR1 / Direct Holdings, Shorting Tether

Exited all my crypto holdings gradually over the past month or two.  I was lucky enough to be able to sell quite big chunks in early January.  Some of these are up over 10X but they were only ever a very small portfolio weight.

[REITs]

Tether - A Crypto Dollar
Image source: Tether.to

There is too much froth / junk / fraud in the market and I dont see downwards trend reversing any time soon.  I think there needs to be a big clear out before we can get decent rises.

If you have read ICO’s whitepapers pretty much all of them seem to me to be either terrible ideas or outright fraud.

I have also sold all my KR1 – at a cumulative profit of about 138%.  Possibly much, much too early.  I will pick up if it falls back (famous last words).  This isn’t the ideal space for me – I am easily shaken out by volatility, particularly when the underlying value is uncertain.  This is doubly so for crypto where – though I can value the underlying holdings you do not know really what they are worth.

On a more positive note I have opened a new position – a crypto short, tether at a -6% portfolio weight – but I am still adding to this.  Teather is a pegged crypto.  It is supposed to work by a person buying $1 of tether – the crypto currency, the $1 is deposited and this then can be refunded when the tether is returned.  It would be a simple, effective system, though there are major money laundering risks.

The issue is how do you verify the deposit is being held?  Ideally via an audit.  Unfortunately Tether has never passed an audit by a reputable accounting firm.

There is also the issue of redemptions – individuals are currently unable to redeem tether for USD.  The tether creation process is also suspect, many believe they are being created out of thin air and are linked to an exchange pushing up the bitcoin price via wash trading.

There is a good timeline of tether related events here:
https://finance.yahoo.com/news/warning-signs-timeline-tether-bitfinex-213741023.html

I find this announcement significant as their assets have increased significantly despite banking issues: https://tether.to/announcement/

Lots of posts on this here https://medium.com/@bitfinexed 

I am being a bit careful what I say on this – I believe they are quite litigious.

In summary:

  • No reputable audit of $2.1bn USD cash holdings.  Should be a very simple operation to audit.
  • Subpoena from Commodity Futures Trading Commission. In a number of other crypto fraud cases subpoena’s have preceeded collapse.
  • Tether issuance intensified following subpoena.
  • Difficulty establishing banking relationships
  • No evidence of redemptions of tether for cash, terms and conditions state that there is no guarantee of redemption.
  • No functioning redemption process for non ‘commercial partners’.
  • Lots of creation of Tethers, almost no destruction.
  • Creation of tethers correlated to market bottoms – some evidence of manipulation.
  • As Tether is pegged losses are limited to financing charges.

There are difficulties with this trade:

  • The only exchange to offer Tether shorting (that I am aware of) is Kraken. Unlike blockchain transactions which can be transferred to external wallets doing this trade means leaving funds on Kraken – introducing counterparty risk.  I quite simply dont trust them even though they are one of the more ‘reputable’ exchanges.
  • Liquidity is highly limited – there may be ways round this with institutional level money such as:
    • Direct engagement with exchanges allowing some form of shorting.
    • Setting up some sort of tether depository. Users deposit tether, receive (say) 5% PA with 24 hours notice for redemption back to tether (with appropriate T&C’s).  Once tether is deposited it is immediately sold for USD.  Once the tether collapse arrives those unwise enough to hold tether can be repaid.  It may be too late to set something like this up.
  • Financing charges are very high – c25% PA on Kraken. Though I think the timing on this is right so this shouldn’t be too much of a problem.
  • You can’t rely on exchanges being working during any sort of tether related ‘event’ it is likely to have a major impact on the bitcoin price.  Prepositioning is therefore neccessary.

As ever, comments are welcomed.

Article by Deep Value Investments Blog