Is it worth shorting Tether?

Tether (USDT), the world’s largest stablecoin, has been the subject of suspicion and short-betting for some time, but the recent market collapse has highlighted these forces. As hedge funds amassed short positions worth “hundreds of millions” against Tether, why were they—according to Tether—losing money?

Hedge funds that opened short positions against USDT in the wake of May’s market selloff showed “a fundamental misunderstanding of both the cryptocurrency market and Tether,” the stablecoin’s issuer said in a social media post Why Hedge Funds Lose Money Shorting USDT, published last week.

By default, stablecoins are intended to hold their value 1:1 against the corresponding fiat currency at all times. When another major stablecoin, TerraUSD, lost its peg against the dollar in May 2022, chaos poured into the cryptocurrency market. However, there is a fundamental difference between traditional stablecoins such as Tether, and algorithmic stablecoins, such as TerraUSD.

Tether (USDT) to US Dollars:

While traditional stablecoins like Tether claim to have their reserves to back up 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.

When TerraUSD and LUNA crashed, Tether fell to $0.95, but eventually managed to recover. Around this time, Tether had to face redemptions of $10 billion in ten days.

But hedge funds started buffering their short positions against USDT, with Tether managers hitting back at them to panic 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 foreign exchange holdings and other commercial assets, including loans made to third parties. This caught the attention of the New York Attorney General, who proceeded to investigate the firm.

According to the latest report on Tether reserves, audited by Cayman-based Moore Cayman, Tether’s reserves as of March 31, 2022 were: 85.64% in cash, cash equivalents and other short-term deposits and certificates; 4.52% in corporate bonds, funds and precious metals, 3.82% in secured loans to non-affiliated entities, and 6.02 in other investments.

Of 85.64% of cash, cash equivalents and other short-term deposits and certificates; 55.53% was said to be in US T-bills, 28.47% in certificates and certificates of deposit, 9.63% in money market funds, 5.81% in cash and bank deposits, 0.41% in non-US T-bills and 0.15% in reverse repurchase agreements.

Recently, the company behind the Tether coin has stepped up its efforts to show that its reserves are solid: “Tether’s portfolio has no Chinese certificates, and as of today, its total certificate exposure has been reduced once again to only about $3.7 billion – from $30 billion in July 2021 – with plans to reduce further to around $200 million by the end of August 2022 and to zero by the end of October/beginning of November 2022,” the company wrote last week.

“What are these assets really worth? It’s practically impossible to tell. They claim 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.

Short selling with Tether, not against Tether

“Tether is a 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 short sell using Tether, rather than against Tether. So if you are betting that BTC will fall, you can short sell BTC using Tether. If Tether were to collapse, BTC’s value would rise relative to Tether, and as a short seller you would be wiped out. That’s bad,” says Maher.

And that’s not all, he adds, saying that a Tether crash will inevitably cause many crypto exchanges to crash, since many of these platforms use Tether as a cash flow.

“And what’s more alarming is that there is big money pushing to make this happen,” he notes, noting that hedge funds have increased their short positions against Tether in recent months.

Shorting Tether ‘all-or-nothing proposition‘

“One thing to note here is that shorting a stablecoin is less risky than shorting other things. If you short bitcoin and it goes up, that’s bad news for you,” says Maher.

“But a stablecoin pegged to the dollar is unlikely to ever rise much above $1. This also means you can short Tether against the risk, which I suspect is what some hedge funds are doing.”

After all, shorting Tether is an “all-or-nothing proposition,” Maher argues, with not much upside or downside as long as it’s tied to the dollar.

Read more “all-or-nothing proposal”