A Bitcoin exchange has issued a product which they characterize as a Tether credit default swap. https://www.coinex.com/announcement/detail?id=26 … It will not surprise you that it is not actually a CDS, nor fit for the purpose you would want to use a CDS for, on *either side* of the bet.
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But remember that complicated legal code which would define a default in the grown-up world of a CDS? Since Bitcoiners don't trust complicated English, they went with simple math: settlement is against a weighted average of the Tether price on a particular exchange.
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This seems to be based on the intuition that Tether prices would go lower than their $1 face value if Tether had a credit event. That is highly non-obvious to me. Consider, for example, the case where Tether is known to have the funds available to satisfy 20% of all claims.
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Does that mean the fair value of a tether is 20 cents on the dollar? Well, if Tether were being liquidated by an orderly process in a court that haircut all depositors equally, yes. But nobody should have the prior expectation of that happening.
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Instead, the scenario is probably "first 20% settled at par, next 80% remain in limbo forever." So if you have balances at a Bitcoin exchange which are notionally dollars but actual tether, and you can withdraw in physical tether, you should be willing to pay *more* than par.
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"What?!" Your end objective is an actual USD in your hand. You have an account at an exchange with $100,000 in the balance but no USD banking. Your only offramps are to cryptocurrency; the only USD-denominated crypto is Tether. You should prefer paying $2+ per Tether today.
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Because tomorrow, Tether will be worthless. This causes the value of the Tether CDS to *decrease* when Tether becomes shakier and then increase (sharply) when the uncertainty is removed by Tether failing. This is not a desirable curve in a CDS product.
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End of conversation
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