Tether, issuer of stablecoin USDT, has slammed hedge funds for shorting the cryptocurrency, saying the bearish bets haven’t paid off and aren’t worth the huge fees the strategy incurs.
Stablecoins have come under increased scrutiny following the high-profile collapse of the Terra blockchain in May. Amid the chaos, USDT temporarily lost parity with the dollar, eventually dropping to $0.95 as investors panicked out of the stablecoin.
The sell-off prompted several hedge funds to take short positions in the crypto markets and more on USDT, the world’s largest stablecoin with assets of $66 billion. Funds that are short USDT have trade financing costs that are paid each time a bet goes against them.
With USDT price capped at $1, most bets have been made on liquidity pools in DeFi and in futures tracking USDT. The goal is to create pressure, “billions of dollars, resulting in tons of outflows affecting tether liquidity and eventually buying back tokens at a much lower price.”
Fund ‘incredibly misinformed’ about USDT
The strategy can be profitable, but Tether believes hedge funds lost millions of dollars on failed short bets because they lacked a basic understanding of how stablecoin USDT works.
“The simple fact that hedge funds view the collapse of Terra as a constructive thesis short of USDT represents the asymmetric knowledge gap between crypto market participants and firms in traditional finance,” the company said in a July 28 blog post.
“The thesis underlying this trade is incredibly misinformed and dead wrong. It is further supported by a blind belief in what borders on outright conspiracy theories about Tether,” it added.
Tether dismissed speculation surrounding its stablecoin as “not true,” including that USDT is not 100% backed by conservative, liquid collateral and that the company’s commercial paper holdings are mostly Chinese debt.
It has also shut down rumors that it has unsecured loans to borrowers. Tether reduced its commercial paper holdings to $3.7 billion from $30 billion a year ago. Stocks are expected to be reduced to $300 million by August and zero by November.
The Company has approximately 86% of USDT reserves in cash or cash equivalents. As of March 31, 2022, U.S. Treasury bills accounted for 56% of that and commercial paper for 28%, according to the latest transparency report.
Tether: Zero profit from shorts
“Brief interest from these [hedge] Funds has created an opportunity for traders who don’t believe USDT won’t step in and collect funds from the other side of this trade,” Tether said.
“This opportunity has been fully embraced by market participants as evidenced by the low funding rates investors can currently obtain for perpetual contracts. If enough USDT longs didn’t step in to raise funds, that rate would be much higher,” it said, adding:
“Traders have shown they are willing to be long USDT and collect the fees paid by hedge funds that go short. The funds could have made great returns by throwing darts… instead they paid funds to traders who were long USDT on perpetual markets, freezing their capital and not making a profit.”
Tether has been under pressure to be more transparent about the reserves backing USDT, an asset pegged one-to-one to the US dollar. Proponents argue that disclosure would help investors better understand potential risks and how auditors interact with the company.
While Tether has provided some clarity on its bankers, it has remained dovish on its USDT reserves, citing confidentiality. The firm is preparing a full audit with a top 12 accounting firm to improve transparency of its reserves.
The move comes as USDT has steadily lost market share in recent weeks following a string of redemptions totaling $14 billion.
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