The past two months have been extraordinarily volatile for the broad cryptocurrency market. Bitcoin, Ethereum, and almost all tokens are down significantly in price as shockwaves rip through traditional financial markets.
USD₮ has maintained its dollar peg despite the volatility and significant redemptions from Tether exceeding $14bn. Tether’s ability to process these redemptions is further evidence of the quality and liquidity of its backing, both of which allow it to process redemptions that would cripple traditional banks.
However, due to the sell-off in the cryptocurrency market various hedge funds have begun to take short positions on the crypto markets. Several of those funds have started to short USD₮ which shows a fundamental misunderstanding of both the cryptocurrency market and Tether.
The Wall Street Journal recently published an article about hedge funds shorting Tether. The article describes why these funds are shorting USD₮:
“So a number of investors have been betting against Tether for much of the last year. But more hedge funds have become interested in shorting Tether after the collapse in May of another stablecoin called TERA USD. And I think that's made some professional investors more skeptical of the stability of the broader crypto ecosystem.”
Tether has written about the many ways in which USD₮ differs from Terra, why USD₮ is more stable, why USD₮ is not subject to the same risks, and why the failure of Terra has no implications for the question of if USD₮ would fail.
Tether has also written about how USD₮ redemptions have shown in practice that USD₮ is not vulnerable to the same death spiral that crippled Terra.
The simple fact that hedge funds view Terra’s collapse as a constructive thesis to short USD₮ represents the asymmetric knowledge gap between cryptocurrency market participants and entities in the traditional finance space.
In short, 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:
- The belief that Tether is or was not backed 100% by conservative, liquid collateral
- The belief that Tether was a holder of Evergrande debt
- The belief that Tether’s commercial paper holdings were predominantly Chinese debt
- The belief that Tether created USD₮ from thin air to pump crypto markets
- The belief that Tether had unsecured loans to borrowers
None of these theories are true.
To these funds, Tether is considered to be a low-risk way to short the cryptocurrency markets that funds can easily explain to their investors. Since everyone knows USD₮ won't increase exponentially in price, these funds believe they found a risk-free way to go short on crypto.
However, this isn't completely true. Funds have a borrow/funding cost to put on the trade. Perpetual contracts are one of the main ways funds gain exposure to short USD₮, and this has been reflected in the open interest on these USD₮/USD contracts.
Short interest from these funds has created an opportunity for traders who do not believe USD₮ will fail to step in and collect funding from the other side of this trade. 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 USD₮ longs stepping in to collect funding, this rate would be much higher. These traders have shown they are more than willing to be long USD₮ and collect the fees paid by hedge funds going short.
Ironically, during a two-month period where multiple large cryptocurrencies collapsed >90%, reputable lenders became insolvent, and hedge funds imploded these traditional hedge funds were short……USD₮.
These funds could have made large returns throwing darts as Coinmarketcap and shorting those coins during this time period. However, instead, they paid funding to traders who were long USD₮ on perpetual markets, locked up their capital, and made no profit.
Tether Reserves and Audit
As icing on the cake, these funds have expressed a short thesis on USD₮ during a time period where even their own conspiracy theories about commercial paper have been rendered irrelevant as Tether has reduced it's commercial paper holding from 30B (July 2021) to a mere 3.7B today. By the end of August, commercial paper holdings will be as low as 300M and will reach zero by October/early November 2022.
Additionally, Tether is currently preparing an audit with a major accounting firm, one of the “Big 12” accounting firms, which kills another conspiracy theory that “Tether would never do an audit”.
Finally, Tether recently confirmed that Tether holds no Chinese commercial paper in its reserves.
Tether remains the most transparent stablecoin in the market and it begs the question of why Tether's critics don't call all other stablecoins to the same standard?
Many industry participants have commented on how the gap in marketcap between Tether and its largest competitors has narrowed. However, the difference between USD₮’s 24hr trading volume and its competitors tells a clearer and more important story.
For example, rather than catering to the traditional banking industry, Tether is focused on being the most used currency for peer-to-peer exchanges, remittances, a tool of freedom and inflation hedge for developing countries.
This is why, while Tether’s marketcap has decreased due to the billions of cash redemptions that it's effortlessly facilitated over the past several weeks, Tether’s 24hr trading volume remains roughly 10x that of its closest competitor. This points to the utility of Tether in daily trading and is the true measure of adoption.
The sheer scale of the integration of USD₮ into the financial plumbing of the crypto industry is an order of magnitude greater than its nearest competitor. This speaks volumes to the confidence the industry, and all of its users have in Tether and USD₮.
It is also a fact that Tether’s competitors are often operating at a loss! Their businesses are losing money each quarter and each year.
Investors must ask themselves, is this sustainable? Can these operations continue losing money forever?
Tether has no need to burn investors' money to promote the adoption of USD₮. This adoption occurs and has always occurred organically because users find real utility in USD₮.
We are interested to see if all of Tether’s competitors can continue to keep up in these market conditions!
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