Thread by @WhitesPhD

I keep reading about the so-called "Coinbase Premium", which is the gap between BTC/USD on Coinbase and BTC/USDT on, e.g., Binance.

Let me be clear, this premium is a fantasy and a clear case of how most "influencers" in the #BTC space lacks simple economic understanding. 1/n👇🏻

The Coinbase Premium (CP), is calculated as the spread between BTC/USD on Coinbase and BTC/USDT on Binance (or, e.g., Bittrex).

Often CP is "sold" as a signal of trade imbalances between retail (mostly trading the spot BTC/USD) vs institutional investors (trading BTC/USDT). 2/n

Yes, there is a gap between the BTC/USD on Coinbase and BTC/USDT on major exchanges (see figure of the CP both looking at Binance & Bittrex BTC/USDT).

By being interpreted as a trade imbalance by commentators and "influencers", one should expect some predictive content. 3/n

Reality is there is only a very modest, in fact non significant, correlation between the signal and subsequent returns on the spot returns of the BTC/USD pair. (Figure show the correlation between CP and both weekly and monthly future returns). 4/n

The existence of the gap has to do with how USDT maintains its peg with the USD. This is due to:

1. On deposit, Bitfinex accounts with 1 USD for 1 USDT deposited.

2. When the USDT/USD deviates from parity, arbitrageurs intervene. 5/n

thus USDT/USD is NOT constant (see fig) 5/n

By looking at the CP it is rather clear that is highly correlated with the USD/USDT pair. This is mechanics at the end, and it is fairly obvious for anybody ever played around with FX. (see figures of USDT/USD against the CP). 6/n

So it's a stretch, to say the least, that CP signals buying/selling pressure on retail vs institutional, but rather simply reflects the fact that USDT/USD is not as stable as you think, and this mechanically reflects in the BTC/USD vs BTC/USDT pairs.

Hope I was clear enough. n/n