Research: Using USDT Supply Data, You Can Increase the ROI of Bitcoin Investments by up to 229%

Summary

  • It is generally accepted that the price of Bitcoin correlates with the supply of stablecoins Tether (USDT).

    BDC Consulting analysts have found that there is indeed a strong and statistically significant correlation between USDT stocks and BTC price.

  • BTC trading model based on USDT supply fluctuations brought ROI of 229% – which means that USDT stock data can be used for trading.

The relationship between the supply of stablecoins and the price of Bitcoin is a subject of ongoing debate. New research from BDC Consulting sheds light on the problem: you can maximize your return on investment in BTC using USDT stock data.

Tether supply and BTC price: what is the connection?

  • In 2019,

    class action against Tether and Bitfinex: the plaintiffs claimed that these companies jointly manipulated the crypto market, “printing” USDT in large quantities during periods of falling Bitcoin prices. By pumping USDT into the system, institutional investors affiliated with Bitfinex initiated an artificial increase in the rate – and then exchanged Bitcoin back for USDT, replenishing their reserves.

  • It is worth noting that a follow-up study by analysts from the University of California at Berkeley and Warwick Business School,

  • did not find evidence of such manipulations. However, this does not mean that there is no correlation between the supply of stablecoins and the price of BTC: on the contrary, it is logical to assume that large players are printing new USDT in preparation for buying Bitcoin, which means they expect the price to rise.

  • Selection of on-chain metrics that correlate with the price of Bitcoin

    Can stablecoin stock data and other on-chain indicators help improve the effectiveness of an investment strategy? To find out, BDC Consulting analysts conducted 3 types of correlation tests (Pearson, Kendall and Spearman) on more than 20 indicators and selected those that showed the strongest correlation with the daily closing price of BTC.

  • In the diagram below, the most correlated metrics are highlighted in green. These are, first of all, the total volume of USDT and the volume in circulation, as well as the volume of USDT transfers (total and average).

  • Analysis of data for stationarity

    Further, the researchers performed a Dickey-Fuller test on the entire time series for USDT stock indicators and the price of bitcoin. This test is widely used in applied statistics to test for stationarity—that is, to establish that the statistics of a series do not depend on when the observation is made.

  • The stationarity test allowed the BDC Consulting team to make sure that the model created on the basis of the available data would work for different time periods. In this case, the correlation model between total USDT holdings and the closing price of Bitcoin passed the Dickey-Fuller test with excellent results.

    After confirming that the correlation is statistically significant and stationary, the analysts calculated the optimal entry and exit points from the market based on USDT supply fluctuations. Next, they overlaid these points on the price chart for 2020-2022

    As you can see from the chart, entry points (shown in green) do correspond to the very beginning of most price rallies and reversals following local or medium-term bearish periods. At the same time, exit points generated on the basis of the model, for the most part, coincide with local peaks, followed by a downward reversal.

  • In the final part of the study, the experts calculated the average return on investment and the Sharpe ratio for a hypothetical investor who bought and sold Bitcoin, guided by the model. The average ROI was 229%, which is three times the return of the best ETF funds

  • in the field of blockchain.

    The value of the Sharpe ratio in this case was 1.4577, which is considered a good result. The Sharpe ratio evaluates the ratio of portfolio return to risk, where a higher value means a better return compared to investing in low-risk assets. It is desirable that the coefficient be greater than one. Thus, investing in Bitcoin based on the USDT price-stock correlation model achieves a good risk-to-reward ratio.

    Conclusions

    An increase in the total supply of stablecoins indicates that large investors are preparing to buy in anticipation of a trend reversal. As the model showed, these expectations are usually justified. At the same time, individual investors and traders can use on-chain data on Tether holdings to determine the best entry and exit points.

  • Analysts BDC Consulting emphasize that optimizing the exit strategy using this model can improve the quality of risk management and even achieve ROI over 200% in the long run.

  • *Information, contained in this article does not constitute investment advice. The analysis results are correct for the period from the end of 2020 to March 2022.

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