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Comment by JumpCrisscross | Hacker News Reader

> I'm looking into shorting it on Kraken

Why do you think Kraken would be in a position to pay you out if Tether goes under? Even the CME contract becomes sketchy when you’re talking about a meltdown at this scale—it’s priced off these exchanges. If they start experiencing edge case behaviour, prices could crash or multiply erratically.

If you want to play this, it would likely involve a more sophisticated bet on exposed public companies and/or credits, or a simple bet with a trusted counterparty.

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Hence the 2% per month contango on a cash-settled futures contract which is practically unheard of.

In theory you should be able to arbitrage by purchasing a bitcoin and shorting the futures contract to collect that sweet 2% per month. However in a wheels-fall-off situation, the price at USDT-only and insolvent USD exchanges could approach infinity, and since your real-world broker won't take your BTC as collateral, they'll simply liquidate you.

Appears arbitrageurs are willing to leave 2% per month on the table to avoid being strung up in the event the wheels fall off.

> In theory you should be able to arbitrage by purchasing a bitcoin and shorting the futures contract to collect that sweet 2% per month

Variation margin. Shorting the future requires you put up cash. If the price goes up, you have to put up more cash. One could hedge away part of this by holding Bitcoin and borrowing against it. But those lending channels are costly and not presently reliable.

TL; DR That 27% spread [1] includes more than just systemic risk.

[1] (1 + 2%) ^ 12 - 1

Not entirely, right, shorting the future requires you put up margin. Current maintenance margin requirement is about $100,000 per contract, which covers 5 BTC, notionally $258,000.

Margin interest at the institutional level is 0.75% per year, so you're free to collateralize your position with something other than cash or bitcoin. You could have 1 short /BTCG1, collateralized by a portfolio of other investments, and buy BTC to cover at an exchange somewhere.

Yeah it's not risk free, but it's certainly not 27% per annum.

I do agree it's a simplification, however.

> Current maintenance margin requirement is about $100,000 per contract, which covers 5 BTC, notionally $258,000.

If the price changes this goes up. With something as volatile as Bitcoin, that’s a material risk.

> Even the CME contract becomes sketchy when you’re talking about a meltdown at this scale

CME has Tether?

Tether USD is a token. If you short Tether, you already got paid. If Kraken is legit, then Tether should not affect its operations.

This. If you short Tether, you already got paid.

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