Hedge fund Fir Tree Capital has opened a Tether (USDT) short and expects it to pay off sometime over the next 12 months, reports Bloomberg.
Fir Tree made the bet as it believes USDT will buckle under the intense regulatory scrutiny it has attracted over the past year. The exact size of its short wasn’t disclosed, but the outlet described it as “substantial.”
New York-headquartered Fir Tree also reckons USDT is backed by watery Chinese commercial paper (read: corporate debt) tied to troubled real estate plays. The firm boasts about $4 billion in assets under management.
Tether claims that all issued and outstanding USDT is fully backed by reserves at a one-to-one dollar peg.
- USDT is the world’s largest stablecoin with over 80 billion tokens in circulation. They currently trade at $1 apiece across hundreds of exchanges.
- Circle’s stablecoin is the next biggest dollar-pegged crypto asset with 52 billion tokens, about 45% fewer. Third-place Binance USD has 18 billion.
- USDT is also crypto’s most liquid asset, with exchanges reporting $52 billion in trades involving USDT over the past day.
Quarterly disclosures reveal USDT is backed by a variety of assets including $24 billion in commercial paper, much of it supposedly well-graded.
Critics have repeatedly floated the Chinese commercial paper theory. Large Chinese real estate company Evergrande defaulted on $1.2 billion in bonds last year. Another firm, Kaisa, defaulted on $400 million in bonds.
USDT’s purported treasury assets (and hypothetically its dollar peg) would’ve suffered significantly if Tether held commercial paper tied to either company.
But Tether execs have evaded confirming just how much of it was issued by Chinese firms. Although, last September Tether issued a statement claiming that it holds no Evergrande debt and never has.
Still, Tether’s dominance makes Fir Tree’s new short position all the more incredible. It’s also quite difficult to make that bet.
Fir Tree reckons it began searching for a way to profit from Tether’s potential collapse last July, and hired third party experts to figure out how to reduce risk and maximize potential gains.
It’s even mulling a new fund dedicated to shorting Tether if enough interest coalesces, noted Bloomberg.
Crypto-native broker Genesis Trading has reportedly helped clients short Tether — either by loaning USDT directly or by constructing its own puts.
Shorting Tether has been risky
For five years since its founding in 2014 (check Protos’ Tether timeline here), there was only one USD-denominated trading pair for Tether.
It was facilitated by San Francisco-headquartered crypto exchange Kraken, led by Tether-friendly chief exec Jesse Powell. Indeed, Kraken was the only place where someone could sell USDT for US dollars at any time of day.
But Kraken’s thin USDT/USD order book periodically instilled terror into holders and would-be short sellers alike.
USDT often dropped randomly, up to 15%. It even spiked beyond $300 on multiple occasions, according to TradingView, which would’ve likely liquidated skeptics maintaining short positions via a Kraken price oracle.
Tether has attracted considerable controversy since then. It became party to multi-million dollar investigations and settlements with the New York Attorney General, as well as the Commodities Futures Trading Commission.
Another hedge fund, BKCoin Capital, previously attempted to short USDT years back but was unable to source a borrow from a counterparty.
But Tether has repeatedly failed to produce a full audit of its reserves, which would help assuage doubts and might dissuade short sellers from betting on its collapse.
Short seller unit Hindenburg even opened a $1-million bounty for specific information about Tether’s reserves.
All while Tether has insulated itself from common bank run tactics. As a private company, it reserves the right to delay direct customers’ USDT redemption requests for US dollar — which to issuances have historically been processed at a 1:20 ratio.
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