Despite the stablecoin firm’s assurances that its reserves are fully backed, Tether short-sellers are building in numbers as investors dump liquidity.
A liquidity pool allowing swaps between the three largest stablecoins Circle (USDC), Tether (USDT), and MakerDAO (DAI) indicated on Friday that Tether’s reserves account for 65% of its composition, indicating that investors are concerned about the long-term prospects. holding a stable currency.
While Tether CTO Paolo Ardoino has stated that the company will honor a $10 billion withdrawal after the collapse of TeraUSD, hoping to allay fears of insufficient reserves, the hedge fund bet big on the decline in Tether’s value. Is. Shortly after the TeraUSD collapse, Tether fell to $0.95 in what is considered a ‘depagging’ event and its market cap fell by $600 million this week.
Tether’s stake in Curve Finance’s 3Pool stood at 29% on May 6, before the TeraUSD dipping event, jumping to 82% on May 12, after the stablecoin lost its peg to the US dollar.
A Tether spokesperson told Bloomberg that it is not unusual for many investors to hold their funds in Tether and swap it for other assets because USDT is a widely held and accessible stablecoin.
According to Jeff Dorman, Arca’s chief investment officer, institutions have been betting on Tether losing its peg for some time by employing one of two strategies: short selling or buying put options. Short-selling involves borrowing USDT in loans collateralized by bitcoin and other cryptocurrencies. Tether can be sold and repurchased when the price falls and it loses its peg, and the original Tether is returned to the lender. The entity then makes a profit from the difference between the purchase and sale price.
In traditional stock markets, the stock price can theoretically rise indefinitely, which means that the short-seller can lose a lot of money. With a stablecoin, the risk of it crossing the dollar peg is minimal, limiting the risk to the institution.
Companies can also buy a put option, which gives the right to sell Tether at a later date, i.e. when the price falls, for maximum profit.
Hedge funds continue to short USDT using Asian counterparties
Between May 27, 2022 and June 27, 2022, there has been an increase in the number of hedge funds shorting Tether through crypto brokerage, Genesis Global Trading Inc. Leon Marshall, head of institutional trades at Genesis, told the Wall Street Journal that the value of the trades was in the range of “hundreds of millions of dollars.”
Crypto companies in Asia are acting as counterparties to short-selling trades initiated by European and American hedge funds.
Tether announced on July 2 the reduction of commercial paper holdings in its reserves to $4 billion. Commercial paper is a form of short-term promissory note issued by companies. In reducing short-term holdings of its commercial paper, Tether aims to give credence to the claims of the reserve structure backing USDT. The reserve structure consists of various asset types designed to enhance the value of USDT.
According to CoinGecko, the USDT stablecoin is still trading on its dollar peg at press time.