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Tether to Hedge Funds Shorting USDT: Strategy Failed, ‘You Made no Profit’

3 mins
Updated by Ryan James
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In Brief

  • Tether says hedge fund bearish bets on USDT failed to pay off.
  • It says funds lost millions in fees on failed shorts because they did not understand how the USDT stablecoin works.
  • USDT lost market share following a series of redemptions, totaling $14 billion, in recent weeks.
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Tether, issuers of the USDT stablecoin, criticized hedge funds for shorting the cryptocurrency saying that the bearish bets have failed to pay off and are not worth the huge amount of fees brought on by the strategy.

Stablecoins have come under increased scrutiny following the high-profile collapse of the Terra blockchain in May. Amid the chaos, USDT temporarily lost its parity to the dollar, falling to $0.95 at some point, as investors exited the stablecoin in panic.

The sell-off prompted several hedge funds to take short positions on the crypto markets, and more on USDT, the world’s largest stablecoin with $66 billion in assets. Funds that are short USDT have a funding cost to put on the trade, paid everytime a bet goes against them.

With the USDT price capped at $1, most of the bets have been taking place on liquidity pools in DeFi and in futures tracking USDT. The goal is to create pressure, “in the billions, causing ton of outflows to harm Tether liquidity and eventually buy back tokens at much lower price.”

Funds ‘incredibly misinformed’ about USDT

The strategy can be profitable, but Tether believes hedge funds have hemorrhaged millions of dollars in failed short bets because they lacked a fundamental understanding of how the USDT stablecoin works.

“The simple fact that hedge funds view Terra’s collapse as a constructive thesis too short USDT represents the asymmetric knowledge gap between crypto market participants and entities in the traditional finance space,” said the company in a July 28 blog post.

“The underlying thesis of this trade is incredibly misinformed and flat-out wrong. It is further supported by a blind belief in what borders on outright conspiracy theories about Tether,” it added.

Tether dismissed as “not true” speculation surrounding its stablecoin, including that USDT was not backed 100% by conservative, liquid collateral and that the firm’s commercial paper holdings were predominantly Chinese debt.

It also rubbished rumors it had unsecured loans to borrowers. Tether cut its commercial paper holdings from $30 billion a year ago to $3.7 billion currently. It expects to have slashed the holdings to $300 million by August and to zero by November.

The company has about 86% of USDT reserves in cash, or cash equivalents. As of March 31, 2022, U.S. Treasury bills accounted for 56% of that, and commercial paper 28%, according to its latest transparency report.

Tether: Zero profit made from shorts

“Short interest from these [hedge] funds has created an opportunity for traders who do not believe USDT will fail to step in and collect funding from the other side of this trade,” said Tether.

“This opportunity has been fully seized by market participants as evidenced by the low funding rate investors can currently collect on perpetual contracts. If there were not sufficient USDT longs stepping in to collect funding, this rate would be much higher,” it stated, adding:

“Traders have shown they are willing to be long USDT and collect the fees paid by hedge funds going short. Funds could have made large returns throwing darts…instead, they paid funding to traders who were long USDT on perpetual markets, locked up their capital, and made no profit.”

Tether has been under pressure to be more transparent about the reserves backing USDT, an asset pegged one-to-one to the U.S. dollar. Advocates argue that disclosure would help investors better understand potential risks and determine how auditors are interacting with the company.

While Tether has provided some clarity on its bankers, it has remained coy about its USDT reserves citing confidentiality. The firm is preparing a full audit with a top 12 accounting firm in order to improve transparency of its reserves.

The move comes as USDT has steadily lost market share following a series of redemptions, totaling $14 billion, over the past few weeks.

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Jeffrey Gogo
Jeffrey Gogo is a Zimbabwean financial journalist with more than 18 years of experience covering local and global financial markets; economic and company news. A climate change enthusiast, Gogo first encountered bitcoin in 2014 and began covering crypto markets in 2017.