Tether Shorters Amass While Crypto Investors Continue to Dump USDT

Updated by Kyle Baird
In Brief
  • USDT filling up liquidity pools since TerraUSD collapse.
  • Institutional investors have been betting big on Tether's price falling by using short-selling or put options with Asian counterparties.
  • Tether recently reduced the allocation of its reserves to commercial paper in a bid to build credibility around its reserves.
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Tether short-sellers are building in numbers as investors dump liquidity, despite reassurances from the stablecoin firm that its reserves are fully-backed.

A liquidity pool allowing swaps between the three biggest stablecoins Circle (USDC), Tether (USDT), and MakerDAO (DAI) indicated Friday that Tether reserves made up 65% of its composition, indicating that investors are anxious about the long-term prospects of holding the stablecoin.

While Tether CTO Paolo Ardoino has said that the company honored $10 billion worth of withdrawals following the TerraUSD collapse, hoping to allay fears of insufficient reserves, hedge funds have bet big on Tether’s value falling ever since. Tether fell to $0.95, considered a ‘depegging’ event, shortly after the TerraUSD collapse and its market capitalization fell by $600 million this week.

Tether’s share of the tokens in Curve Finance’s 3pool was 29% on May 6, before the TerraUSD depegging event, before jumping to 82% on May 12, causing the stablecoin to lose its peg to the U.S. dollar briefly.

A spokesperson for Tether told Bloomberg that it is not unusual for many investors to hold their funds in Tether and swap it for other assets since USDT is a widely held and accessible stablecoin.

Institutions shorting Tether

According to Jeff Dorman, chief investment officer at Arca, institutions have been betting on Tether losing its peg for some time by employing one of two strategies: short selling or buying a put option. Short-selling involves borrowing USDT in a loan collateralized by bitcoin and other cryptocurrencies. The Tether can be sold and repurchased when the price drops and it loses its peg, and the original Tether returned to the lender. The institution then profits from the difference between the buying and selling price.

In conventional stock markets, the price of a stock can theoretically increase indefinitely, meaning that the short-seller can lose much money. With a stablecoin, the risk of exceeding its dollar peg is minimal, limiting the risk to the institution.

Companies can also buy a put option, which bestows the right to sell Tether later, i.e., when the price falls, for maximum profitability.

Hedge funds continue to short USDT using Asian counterparties

Between May 27, 2022, and June 27, 2022, the number of hedge funds shorting Tether through Genesis Global Trading Inc., a crypto brokerage, has increased. Leon Marshall, head of institutional trades at Genesis, told the Wall Street Journal that the value of the trades was in the “hundreds of million dollars” range.

Crypto companies in Asia have been acting as counterparties to the short-selling trades initiated by European and American hedge funds.

Tether announced a reduction of commercial paper holdings in its reserves to $4 billion on July 2. Commercial paper is a form of a short-term promissory note issued by companies. Tether’s goal in reducing short-term holdings of its commercial paper is to lend credibility to claims about the reserve composition backing USDT. The reserve composition consists of various asset types designed to prop up the value of USDT.

The USDT stablecoin is still trading at its dollar peg at press time, according to CoinGecko.

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