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.

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

1. How do Stablecoins work?

2. Researching the Pair

3. Developing a Trading Strategy

4. Final Remarks

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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:

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.

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Researching the Pair