This morning on Twitter, I went “OH MY GOODNESS” at this depth chart for the USDT/USD pair on the Kraken exchange, as at 0700 UTC:

Everyone went, “uh, OK … what am I looking at, and why is this important news?”

This is a picture of a market where lots of people want to sell tethers for dollars, almost nobody wants to buy tethers for dollars, and the price is hanging in the air like Wile E. Coyote about to get gravity lessons.

Why is this important? Because Tether is a lot of what appears to be holding the price of Bitcoin up.

So here’s how to read a depth chart — and what all this seems to mean!

Tether and audits

Reader Aranfan asks:

What I’m wondering is how a thing on a completely different blockchain boosts the price of bitcoin.

To recap: a Tether (USDT) is a dollar-substitute token, that you can move around more easily than an actual US dollar. It’s popular with exchanges that can’t or don’t want to deal in USD.

Tether, Inc. — which was set up by the people from the large crypto exchange Bitfinex, and remains closely associated — issue these as tokens running over other blockchains. They state that every USDT is backed by a US dollar on deposit. So far, the market has treated USDT as if they are indeed pegged to USD.

There have been a lot of questions about this — because Tether has been furiously issuing new USDT, coinciding with dips in the price of a bitcoin. This accelerated recently — over half a billion dollars’ worth of tethers have been issued just this month.

They maintain that all of these new USDT are backed by USD on deposit — that this isn’t just fictional reserve banking. Phil Potter from Bitfinex assured me of this in email, and Lao Mao, proprietor of the BigONE exchange, posted recently of how he discussed this with them, looked at the books and was reassured — but there has never been a proper audit of all of this.

Bitfinex/Tether promised a full audit was in progress — but a few days ago, their auditor, Friedman LLC, scoured their site of all mention of Bitfinex and Tether. Last night, Bitfinex confirmed that the two had ended their relationship:

Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame.

The market has not responded well to this, and, overnight, seems to be pricing tethers at rather less than a dollar.

BTC is about $400 lower on GDAX/Coinbase than Bitfinex for once, because GDAX deals in actual dollars and Bitfinex in tokens that the market doesn’t quite so strongly believe are dollars any more — so traders are selling their not-USD on Bitfinex and buying BTC, which they can take elsewhere to sell for USD. This raises the “price” on Bitfinex and lowers it on the other exchange.

The other problem is that there are no reports of anyone ever successfully redeeming their USDT for USD from Tether themselves — actual money goes in, it doesn’t come out.

There is literally one USDT/USD trading pair that you can cash out of tethers in, on Kraken — go here and select “USDT/USD” at top-left. It’s not a very usable market, because there’s no depth to the order book — hardly anyone wants to buy tethers, certainly not as many as want actual money — so if you wanted to cash out 1,000,000 USDT then you’d be getting USD 0.30 each for the last ones. (Another example of “market cap” being a bad and meaningless number — you could tank a $2b market cap with a $1m sale.) Most of the activity on it looks very like bot-based wash trading around 1 USDT = 1 USD. (On that video, note the regular, repetitive transactions for the same amounts — up a bit, then down a bit.)

Now people are trying to use this tiny gateway to get real dollars out.

Reading a depth chart

Let’s look again at that tweet of Kraken USDT/USD around 0700 UTC:

Left to right is USD price, bottom to top is quantity of USDT. The red (left) is “buy” orders for USDT when the USD price goes down that far, and the black (right) is “sell” orders for when it goes up that far. The bottom chart is the orders themselves, the top chart is cumulative.

Here’s the bitcoin depth chart from GDAX at 1:16pm today, which is a bit more routine. This is a snapshot of the state of the market at a particular moment: 1316 UTC on 28 January 2018. The bit at the bottom, with the white line indicating it, is the last-traded price as of this moment.

This is a chart of the market makers — the people putting up offers to buy or sell. On the left there’s a pile of people who want to buy BTC from you, at what price they’ll pay. On the right are a pile who want to sell BTC to you, at what price they’ll accept.

(The term “market maker” is a bit different in security trading, but the crypto usage is often just “whoever puts up an offer.”)

The lines show how many BTC would need to be bought or sold to reach a given price point.

The green line (left) is cumulative “buy” orders below the current price — if you have coins to sell, they will buy them from you. The red line (right) is cumulative “sell” orders above that price — if you want to buy coins, they will sell them to you.

Orders are processed in order of price going down for buy orders, in order of price going up for sell orders. If you want to sell 10 BTC and there are buy orders for 2 BTC at $11,300, 3 BTC at $11,295 and 6.5 BTC at $11,290, you’ll fulfill all of the first two and most of the last, and you’ll receive $112,935 — minus the exchange’s trading fee, since GDAX charges the market taker (that’s you).

On the GDAX chart, you can also see vertical lines — these are “buy walls” and “sell walls”. For the price to keep going up or down through that wall, the order has to be fully satisfied. e.g., in the above chart, 150 BTC of sales would drop the price to $11,200, but it wouldn’t go lower until the 50 BTC order at that price had been filled.

In normal security or commodity trading, the order book — the set of all the buy and sell orders — has a fair bit of depth. So the market is reasonably robust and the order book isn’t thin and it’s hard to manipulate it very much.

But this is crypto. So the order books are super-thin, separated into one order book per exchange ‘cos the market’s structure is approximately the stupidest possible … and so the price is super-manipulable!

Spoofing

Look again at that GDAX chart. There’s a lot of information in there, in a compact at-a-glance format. You may get the feeling “wow, more people want to buy, Bitcoin’s on its way up. Maybe I should buy!”

But what if some of those orders … aren’t real? What if someone places some great big walls … but the orders are withdrawn as soon as the price gets anywhere near them?

This is called “spoofing” — where you put in orders you have no intention of letting go through, to manipulate other traders’ perceptions, and hence the market.

Spoofing is illegal in the US since the 2010 Dodd-Frank act — the precise wording (§747) is “bidding or offering with intent to cancel before execution.” For example, the CFTC just fined Deutsche Bank and HSBC for doing this in US futures markets.

It’s not frequently prosecuted, because doing so involves proving intent. Quite a lot of people — and high-frequency trading algorithms — put in orders they then withdraw.

Of course, like other market manipulations, it’s endemic in cryptos because that’s what “unregulated” means in practice. Bitfinex’ed’s post “Meet Spoofy” shows one apparent bot, Spoofy, in action. The crash a couple of weeks ago involved a lot of spoofed walls.

Margin trading

There aren’t enough USDT to just straight-up buy BTC — or place spoof orders — to prop up the price. But they can be used to fuel margin trading.

Margin trading is borrowing (from your broker or, in cryptos, the exchange) to multiply the effect of your trading — so rather than just having $100, you can borrow and trade with $200, using the $100 as collateral. If your trade pays off, you’ve done really well!

If your trade doesn’t pay off, or even if the price dips enough that it looks like it won’t, the lender forces you to liquidate the whole position and pay them back immediately, and you lose your collateral. The ratio of collateral to amount borrowed determines how far the market can dip from the price you bought in at before your position is liquidated.

In crypto, margin traders have a habit of borrowing a lot on margin. 5× or 10× is not uncommon. Bitmex offers up to 100× margin trading.

(It’s absolutely nuts to margin-trade cryptos, because they’re so volatile, but tell crypto gamblers that.)

So a small amount of USDT lent for margin trading can allow the creation of a large order.

(This is fine — as long as tethers are real.)

Which may not exist when the price gets there.

(This is not so fine, either way.)

Conclusion

Tether has dipped before — 1 USDT was 0.91 USD in April 2017, around the time the present massive crypto bubble was starting — and remember that, per chapter 8 of the book, this bubble was started by Bitfinex and Tether losing their US dollar banking — and it’s peaked at 1.07 USD in recent times. And more depth is showing up.

But last night, and today’s spread between USD and USDT exchanges, looks very like a worried market, trying to get out.