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12th March 2022 > > Shorting Tether.

Updated: Jul 23, 2022

tl;dr

Stablecoins are potentially the single biggest risk to the crypto industry.


Market Snap (at time of writing)








Market Wrap

All quiet.


Curious Cryptos’ Commentary – Shorting Tether (USDT)


On the 9th October 2021, the CCC took a look at stablecoins, and USDT in particular. Back copies of the CCC are (slowly) being loaded into the commentary section of our recently launched website (www.curiouscryptos.com just in case you haven’t been paying attention) but not yet that far back.


In summary, USDT is an attempt to create a coin that is always valued at $1, with reasonable success to date:

The means to achieve price stability is for the coin to be backed by collateral, ideally 1:1 with USD, for those who still believe that fiat will be around for some time yet.


Also, in an ideal world, the assets backing USDT would be declared, and regularly audited. That requirement has been partially fulfilled but in a worrying way to my mind with a great deal of opaqueness.


For instance, Tether Ltd. had been claiming reserves were 100% held in cash. In May 2021 a statement by the company showed less than 3% in cash, with a lack of detail about commercial paper making up 66% of the total.

In addition, it has been suggested by Bloomberg some of the collateral behind USDT are loans made to crypto companies. Those of you familiar with correlation risk understand that it is toxic when combined with credit risk.


These concerns of mine are being heard, but unfortunately not by Tether Ltd.


Fir Tree Capital Management – a $4bn hedge fund – is shorting USDT based on regulatory concerns around stablecoins, which we have touched on many times, and the potential for a lack of quality in the collateral being held.


In many ways, on the face of it this trade looks a no-brainer.


In theory, if you short at $1, then the price should never exceed $1, and so the only costs you can ever incur are borrowing costs. The repo market for cryptos generally is still in its infancy, but I suspect that all those centralised exchanges offering 20%+ APR to deposit USDT are open to defraying some of the marketing costs by lending out those deposits to Fir Tree.


On the upside of the trade, if concerns about the quality of the collateral behind USDT gain greater credence, then a collapse in investor confidence – and hence its value against USD – is a possible scenario. The gains from such an event could be mouth wateringly juicy.


The only real risk is that if the trade becomes overly popular then the foundations are laid for a short squeeze rally higher, which might be difficult to navigate.


The question is, why do we care?


Be in no doubt, the collapse of one of the stablecoins would be likely to have a knock-on effect on all the other stablecoins. The impact on the broader crypto market would be monumentally disastrous.


There would be a wholesale collapse in prices, bankruptcy and liquidation of many centralised exchanges, the leveraged children would be destroyed (not such a bad thing to be honest), and the popular press would be banging an extreme anti-crypto drum.


But that is not all.


The pressure on lawmakers and regulators in the US and in the EU to reverse course in their current desire to provide an environment that fosters and encourages innovation and growth in the crypto industry might become too much to bear.


Forget any other scenario that might delay the crypto revolution. The single biggest risk is for the world to find out that stablecoins are simply a sham. I fervently hope they are not.

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