This is the follow-up to our original piece covering the SALT loan arbitrage opportunity.
Many cryptocurrency enthusiasts will be aware of SALT Lending, a crypto-collateralized loan platform that launched its product in the closing days of 2017. The launch drew massive attention with a crafty announcement that SALT, the platform’s native token, could be used to repay loan principal as well as interest. This appeared to open up a massive arbitrage opportunity as SALT was trading on exchanges at well under $20, while it was redeemable at a fixed $27.50 on the SALT platform.
The market first responded exactly as expected, driving the price up roughly 80% in a day from a ~$10 pre-announcement value.
Initial reaction
However, instead of continuing towards $27.50, the price instead plummeted and speculators were left holding losses, with some even going so far as to accuse the SALT team of fraud.
Correction as information is correctly understood
At the time, we made the following assessment of the situation.
“ The opportunity is real, but there aren’t yet sufficient real loan repayments with SALT occurring to overcome the market’s suspicion following the initial euphoria. As reports begin to surface of real repayments with SALT and loan volume grows, the sentiment should very quickly change and SALT could potentially experience a rapid correction closer to the $27.50 peg. Timeframe? Hard to say, as it depends on how quickly the SALT team can process loans, but at the current rate of ~$100k in loans approved hourly it would be surprising if things didn’t start moving by next week.”
After trading roughly flat around $12 for a week (meaning that value relative to BTC declined), SALT began trending upwards as the team provided updates on growing loan approvals, and finally spiked as shown below after Palm Beach Confidential caught wind of the opportunity and released a buy rating on the 8th.
One day after the no-prepayment clarification
This jump, however, was stifled that evening when one of SALT’s employees posted a clarification to the loan conditions in a community discussion channel. According to him, while SALT can be used to repay principal and interest, early repayment is not possible. Direct quote below:
This unexpected condition, with obvious restrictions on the arbitrage play, served to put a damper on the uptrend, and the price sits around $14 as of this writing. So what does the future hold for SALT?
Understandably, this is how some of the community felt after the news
In the short term, it’s hard to say. This ‘clarification’ on early repayment is a significant restriction that should have been disclosed along with the original SALT principal+interest announcement, and it’s hard to say that more unexpected limitations won’t be applied in the future. A skeptical market may punish SALT’s price further for some time, although in the current bull market this is more likely to be in the form of a flat valuation rather than a sharp drop.
In the longer term, given the assumptions that SALT remains redeemable for at least $27.50 at can still be used to repay principal, exchange prices should certainly converge towards that value. Although the return may pale in comparison to the success stories of crypto, this remains one of the closest things to a sure bet in the market, as the arbitrage opportunity still exists, just forcibly spread out over a period of months. SALT arbitrage won’t be making many people rich, but it can provide relative peace of mind, and that’s a rare thing in cryptocurrency.
As for us, Starscape Capital did not and does not hold a position in SALT. As we have previously discussed, the indeterminate time horizon for the trade was the primary factor in this decision, and we will not be participating in SALT loan arbitrage given the events of the past few days.
Interested in reading more about crypto arbitrage? Check out our primer at https://medium.com/@starscapecapital/part-one-introduction-to-crypto-arbitrage-4b3d3458e2cb
About Starscape Capital: We seek to exploit pricing inefficiencies through arbitrage. The upcoming Arbitrage Flagship Fund will raise capital for this purpose.
About the ICO: Opens Jan 19. Ends after 1 week or when 3,000 ETH has been raised. Tokens are used to receive profits and reclaim invested ETH. Tokenholders will also be able to contribute to future funds ahead of the public.