Tether, issuers of the USDT stablecoin, criticized hedge funds for shorting the cryptocurrency, saying the bearish bets did not pay off and are not worth the huge amount of fees generated 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 peg to the dollar, falling to $0.95 at some point, as investors abandoned the stablecoin in a panic.
The sell-off prompted several hedge funds to take short positions in crypto markets and further into USDT, the world’s largest stablecoin with $66 billion in assets. Funds that are short on USDT have a funding cost to put on the trade, paid each time a bet goes against them.
With the price of USDT capped at $1, most of the bets have been placed on liquidity pools in DeFi and futures tracking USDT. The goal is to create pressure, “in the billions, causing tons of outflows to hurt Tether’s liquidity and eventually buy back tokens at a much lower price.”
Funds ‘Incredibly Misinformed’ About USDT
The strategy may be profitable, but Tether believes that hedge funds have lost 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 the Terra crash as too short a constructive USDT thesis represents the asymmetric knowledge gap between crypto market participants and entities in the traditional financial space,” the company said in a statement on July 28.
“The underlying thesis of this trade is incredibly ill-informed and completely wrong. It is further backed by a blind belief in what borders on outright conspiracy theories about Tether,” the company added.
Tether dismissed as “untrue” speculation surrounding its stablecoin, including that USDT was not backed 100% by liquid, conservative collateral and that the company’s commercial paper holdings were predominantly Chinese debt.
Tether also dismissed rumors that it had unsecured loans for borrowers. Tether reduced its commercial paper holdings from $30 billion a year ago to $3.7 billion today. That expects to have cut holdings to $300 million in August and to zero in November.
The company holds around 86% of USDT reserves in cash or cash equivalents. As of March 31, 2022, US Treasury bills accounted for 56% and commercial paper for 28%, according to their latest transparency report.
Tether: Zero Profit Made from Shorts
“The short-term interest from these [hedge] funds has created an opportunity for traders who don’t believe USDT will stop stepping in and raising funds on the other side of this trade,” Tether said.
“This opportunity has been fully seized by market participants, as evidenced by the low funding rate that investors can currently charge on perpetual contracts. If there were not enough long USDT positions to raise funds, this rate would be much higher,” the company added.
In short, Tether has been under pressure to be more transparent about the reserves that back USDT, an asset pegged one-to-one to the US dollar. Proponents argue that the disclosure would help investors better understand potential risks and determine how auditors interact with the company.
While Tether has provided some clarity on its bankers, it has remained coy on its USDT holdings citing confidentiality. The firm is preparing for a full audit with a top 12 accounting firm to improve the transparency of its reserves.
By Audy Castaneda
