Tether (USDT), the world’s biggest stablecoin, has been subject to suspicion and short-betting for a while, but recent the market collapse accentuated these forces. As hedge funds amassed short positions worth “hundreds of millions” against Tether, why did they – according to Tether – lose money?
Hedge funds that opened short positions against USDT in the wake of May’s market sell-off showed “a fundamental misunderstanding of both the cryptocurrency market and Tether”, the stablecoin’s issuer said in a social media post Why Hedge Funds are Losing Money Shorting USDT, published last week.
Stablecoins are by default meant to keep their value 1:1 against the corresponding fiat currency at all times. When in May 2022, another major stablecoin, TerraUSD, lost its peg against the dollar, chaos spilled into the cryptocurrency market. There is a fundamental difference between traditional stablecoins like Tether, and algorithmic stablecoins, like TerraUSD, however.
Tether (USDT) to US Dollar:
While traditional stablecoins like Tether purport to have their reserves to back their tokens in cash and cash instruments, the algo stablecoin, TerraUSD, was meant to maintain dollar parity via an algorithmic relationship with a sister token, LUNA.
As TerraUSD and LUNA crashed, Tether slipped to $0.95, but ultimately managed to get back up. Around this time, Tether had to meet redemptions of $10bn over the span of ten days.
But hedge funds took to buffering up their short positions against USDT, with Tether execs hitting back at them for creating panic in the market.
But the controversy surrounding Tether predates TerraUSD’s collapse.
Tether originally proclaimed that each of its tokens is backed by one US Dollar, but in 2019, Tether removed this claim from its website and changed it to say that each token was backed by currency holdings and other commercial assets, including loans made to third parties. This caught the attention of the New York Attorney General, who proceeded to probe the firm.
According to the most recent report on Tether reserves, audited by Cayman-based Moore Cayman, as of 31 March 2022, Tether’s reserves were: 85.64% in cash, cash equivalents, and other short-term deposits and commercial papers; 4.52% in corporate bonds, funds and precious metals, 3.82% in secured loans to non-affiliated entities, and 6.02 in other investments.
Out of 85.64% of cash, cash equivalents, and other short-term deposits and commercial papers; 55.53% was said to be in US Treasury Bills, 28.47% in commercial paper and certificates of deposit, 9.63% in money market funds, 5.81% cash and bank deposits, 0.41% in non-US Treasury Bills and 0.15% in reverse repurchase agreements.
Lately, the company behind the Tether coin, has intensified its efforts to show its reserves are solid: “Tether’s portfolio holds no Chinese commercial paper and as of today, its total commercial paper exposure has been reduced yet again to a mere circa $3.7bn – from $30bn in July 2021 – with plans to further decrease to circa $200m by the end of August 2022 and to zero by end of October/early November 2022,” the company wrote last week.
“What are those assets really worth? It’s practically impossible to say. They argue that the recent TerraUSD collapse was a test that Tether passed with flying colors,” says crypto trader and educator, Max Maher in a recent video.
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Short-selling using Tether, not against Tether
“Tether is an central part of the crypto ecosystem, a crash would be terrible for the entire crypto world. We don’t want this to happen, we really don’t.” Max Maher says.
“Many traders make short sells using Tether, rather than against Tether. So if you’re betting BTC will fall, you might short-sell BTC using Tether. If Tether were to collapse, BTC’s value would soar relative to Tether, and as a short-seller, you would be cleaned out. That’s bad,” Maher says.
And that’s not all, he adds, as he says that a Tether crash would inevitably cause many crypto exchanges to crash, as many of these platforms are using Tether as a cash flow.
“And what’s more alarming is that there’s big money pushing to make this happen,” he notes, as he refers to the hedge funds increasing their short positions against Tether in the recent months.
Shorting Tether ‘all-or-nothing proposition’
“One thing to note here is that short selling a stablecoin is less risky than shorting other things. If you short bitcoin and it soars, that’s bad news for you,” Maher says.
“But a stablecoin pegged against the dollar is unlikely to ever soar way above $1. This also means that you can short Tether against its risk, which I suspect is what some hedge funds are doing.”
After all, shorting Tether is ‘all-or-nothing proposition’ proposition, Maher argues, there’s not much upside or downside so long it stays pegged to the dollar.