Harvesting the Depegging Risk Premium
Mean Reversion Trading on FDUSD/USDT
In the previous article we talked about how to reduce trading costs and mentioned a pair on Binance that has 0 fees, FDUSD/USDT.
Reducing Trading Costs
In the previous article we talked about the dynamic between volume and price and talked about a strategy that takes advantage of volume spikes during NYSE open. One problem with the strategy was that it’s pretty sensitive to trading costs since the holding time is pretty short.
Both of those are stablecoins which are supposed to stay close to 1 USD in value but of course this won’t always be the case, we are gonna see fluctuations around 1 USD.
The smaller and less known the stablecoin is the heavier those fluctuations are, this means more profit but also a much higher depegging risk. (A stablecoin deviating far from 1 USD, potentially permanently).
One example for this trade that wouldn’t have ended well is TerraUSD. That’s the risk you get paid for when trading stablecoin mean reversion, you are assuming it will return to the mean eventually.
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Table of Contents
How do Stablecoins work?
Researching the Pair
Developing a Trading Strategy
Final Remarks
How do Stablecoins work?
If we want to trade something we should understand how it works.
That way we can assess any risks, flaws in logic and opportunities before we jump into the trade.
One such opportunity I was able to find is the rebase machenism of AMPL.
You can read more about it and how to take advantage of it in this article:
Event Based Momentum and Mean Reversion
In the previous article we looked at a bunch of different properties and behaviors of the limit orderbook. In this article we are gonna look at a strategy which I actually ran back in the FTX days. You could still run it nowadays but the liquidity is lower nowadays since FTX was the biggest exchange with AMPL.
We can broadly categorize stablecoins into the following 3 groups:
Fiat-Collateralized Stablecoins
Fiat-Collateralized Stablecoins use fiat currency as collateral.
There are also coins which use other assets as collateral like for example gold.
Crypto-Collateralized Stablecoins
Crypto-Collateralized Stablecoins use cryptocurrencies as collateral.
Since cryptocurrencies are a lot more volatile there is more collateral than stablecoins issued.
One example is DAO, it has ETH as collatoral worth 150% of DAO in circulation.
That way even if ETH suddenly drops 33.3% DAO won’t depeg.
Algorithmic Stablecoins
Those are the interesting kind, the supply of the stablecoin is controlled through some algorithm. A lot of the time those stablecoins don’t have collatoral which makes them much more risky and volatile but also brings many more opportunities.
TerraUSD was one such example for an algorithmic stablecoin, another one is AMPL.
FDUSD
FDUSD is a fiat-collateralized stablecoin, it holds an equivalent amount of USD in reserves. Those reserves are audited and regulated.
Since it’s a fiat-collateralized stablecoin the risk isn’t as big as with stablecoins like TerraUSD.