- It's been a rough year for crypto.
- Had Bitcoin getting hammered today, hitting its
lowest level since last July.
- $2 trillion free fall rattles crypto to the core.
- Winter is here. The tide is completely out.
- And in this chaos, there's a massive bet
happening under our noses, one that could profit
off the total collapse of crypto - shorting Tether,
the world's largest stablecoin.
Hedge funds are betting hundreds of millions that
Tether will lose its peg crashing completely.
And that might have something to do with
the fact that just a few months ago,
investors watched another stablecoin UST do just that.
Many investors think Tether is next in
a long line of failed stablecoins.
But that's not the only reason for shorting Tether.
In its seven years of trading, it's been
plagued by controversy, scandal, and even criminal investigations.
There have been persistent questions about who owns the
company behind the coin and whether the business actually
has the assets it claims to own, the assets
that are supposed to back the coin.
With all that, shorting Tether meaning betting that it will fall,
may seem like a good bet, but hold on.
Because Tether is a very different
digital currency than the fallen UST.
And for better or for worse, Tether plays
a critical role in the entire crypto space.
In fact, Tether, known by its ticker symbol USDT,
is so central to the crypto market that a
Tether crash could collapse the entire market!
Let's break down what you need to know
about stablecoins and the great Tether short.
First of all, Tether is a stablecoin.
A stablecoin is a digital currency that's
pegged to the value of another currency
or a commodity or some other asset.
Stablecoins are extremely useful if
you're a crypto trader.
You don't have to keep converting to
and from fiat currencies, and they are
excellent for international transactions, perfect for avoiding
money transfer fees and banking delays.
Like many others, Tether is pegged to $1.
That's also true for UST.
Or it was true until it wasn't.
But not all stablecoins work the same way.
Tether is actually very different from UST.
Tether is a fiat backed stablecoin,
while Terra is an algorithmic stablecoin.
UST wasn't backed by a fiat currency or gold.
It was backed in part by a digital token called Luna.
The whole idea was to
One UST is always redeemable for $1 in Luna.
So if UST's value fell to, say, $0.98, there is
an arbitrage opportunity, an incentive for people
to trade their UST in, burning it
in the process, this decreases the supply and
helps get the price back up to $1.
But this was really a faith-based system, and
let me tell you, people lose faith quickly.
In May 2022, it all hit the fan. Most UST,
holders began selling, and it became
completely unpegged from the US Dollar.
It went from being worth around $1 to just $0.02
The Luna mechanism just didn't work, creating
one of the darkest events in crypto history,
an Enron size collapse.
This caused investors to bail
on stablecoins as a whole.
And since then, Tether has lost billions in market cap.
The reason being, many people just don't trust Tether.
They don't believe it can actually be redeemed for $1.
If this were found to be true,
the entire crypto market would essentially collapse.
I can't tell you enough how bad this
would be, even if you don't hold USD.
So at this point, it's probably a good time to dig
up the facts around Tether and let you decide for yourself
what you think about this company and the stablecoin.
Tether's business has been unusual from the start.
It launched in 2014 by a trio of entrepreneurs, one
of whom was the former child actor Brock Pierce, who
is actually kind of my neighbor here in Puerto Rico.
But that's neither here nor there, because Pierce was
in and out of a number of tech startups
before Tether, and Tether was no different.
He and his partners quickly sold Tether to new
owners, and things appeared to go really well.
After the sale, the crypto exchange
Bitfinex launched Tether token pairs.
That's huge for any token.
The Tether promise was that each
token is 100% backed
by US Dollars held in reserve.
It made perfect sense for crypto.
But then things got weird.
Remember how Bitfinex was the first
crypto exchange to offer Tether?
Well, it was no coincidence.
In the 2017 Panama papers leak, it was revealed
that the new owners of Tether also own Bitfenex.
Shocked by this, investors sued Tether over
this deception, and it didn't end there.
An avalanche of lawsuits against Tether
were building in the shadows.
And the same year, Tether got hacked to the tune of
$31 million and had to rebuild its platform.
For a year while that was going on, customers were
unable to withdraw cash from the company.
But investors didn't seem to care much.
Hey, the value keeps going up.
The same year as the Panama papers
and the hack, Tether's value actually soared
from $50 million to $1.4 billion.
Tether was becoming big business.
But big business gets more scrutiny.
Questions about their assets become
more and more important.
In 2019, investors noticed that Tether had removed its
claim that all tokens are 100% backed by US Dollars.
The company now says it's backed by
currency holdings and other commercial assets, including
loans made to third parties.
All of this got the attention
of New York state's attorney general.
The AG alleged that Bitfinex had improperly
siphoned off $850 million from Tether to cover
up losses in Bitfinex customer accounts.
Apparently, Bitfinex had been scammed as well
by a shadow banking service and was
trying to cover up this embarrassing loss.
In 2021, Tether settled with New York state, paying
an $18.5 million fine and admitting no wrongdoing.
As part of that settlement, Tether agreed
to release additional information about its assets.
And many had hoped that this would mean regular audits.
But so far, Tethers only released attestations, which
are not as detailed as full audits.
The first one of these showed that less than 3%
of Tether's assets were in US dollars, and nearly half
of the total at the time was in commercial paper,
meaning unsecured loans the company made to third parties.
But why does this matter?
Simple,
With these loans, Tether had turned itself
into a shadow bank, an unregulated lender.
And who might borrow from unregulated lenders?
People who can't get loans elsewhere.
Risky borrowers.
So the question remains,
It's practically impossible to say,
given Tether's secrecy.
And many skeptics have pointed out that
Tether's accountants are located in the Cayman
Islands, a notorious tax haven.
So if you want a short Tether, there's no
shortage of good arguments on your side.
Now, short selling again is essentially betting that
the price of an asset will fall.
The further it falls, the more money you make.
To short sell USDT,
you need a trading platform that allows you to do it,
which is actually kind of hard to find.
Now this can be done on FTX International
with their 3X bear token,
but unfortunately, US users can't do this.
But what a US user can do is grab the
link in the description for my sponsor, FTX US, and
then use them to buy the stablecoin Dai.
Send that Dai stablecoin to a wallet like
MetaMask, connect to the Aave platform, and then
on Aave, supply Dai and borrow USDT.
Of course, none of this is financial advice, but
FTX is also really cool because not only can
you buy cryptos, but you can also purchase NFTs
and now stocks on the same platform.
There's really nothing quite like it online.
Again, they will be linked down below.
So the question is, should you do it?
And what are the implications?
Again, Tether is a central
part of the crypto ecosystem.
A crash would be terrible for the entire crypto world.
We don't want this to happen, we really don't.
Many traders make short sells using
Tether rather than against Tether.
So if you're betting Bitcoin will fall,
you might short sell Bitcoin using Tether.
If Tether were to collapse, Bitcoin's value would
soar relative to Tether, and as a short
seller, you would be cleaned out. That's bad.
And that's not all.
Many crypto exchanges use Tether in
their day to day operations.
This is often their cash flow.
A Tether crash would almost certainly cause
many crypto exchanges to collapse. Catastrophic.
And what's more alarming, is there's big
money pushing to make this happen.
According to the Wall Street Journal, hedge
funds have put hundreds of millions of
dollars into bets against Tether.
And naturally they want to make
sure those bets pay off.
Tether execs have accused the hedge funds
of trying to start a panic in
the market, they argue something completely different.
They say the recent Terra collapse is actually proof
that Tether is healthy, that the Terra crash was
a test that Tether passed with flying colors.
But many investors are still running for cover.
During the Terra meltdown, Tether briefly
became unpegged from the US Dollar,
falling as far as $0.95 before
eventually recovering back to its dollar peg.
In the space of ten days, Tether had to redeem
and the company's boasting that they did so successfully.
So if nothing else, Tether is at
least more stable than UST ever was,
which isn't saying much, but it's something.
And especially since Terra's crashed, Tether's
management seems to be taking investors
worries about its assets more seriously.
It announced recently that it will reduce its commercial
paper holdings to less than 10% of its entire
portfolio in the short run, and in the long
run, bring that down to zero.
If they actually go through with it,
if they're telling the truth, Tether won't
be an unregulated bank much longer.
This will absolutely make them more stable,
which is what they should be.
But without full details on their assets,
we can never be totally sure.
And that's the problem that still lingers.
One thing to note here is that
If you short sell Bitcoin and it
soars, that's bad news for you.
If you short Bitcoin at $30,000 and it
goes to $100,000, you just lost $70K.
But a stablecoin pegged to the dollar is
unlikely to ever soar way above $1.
So there's less downside risk built right in.
This also means you could short Tether as a
simple hedge against its risks, which I suspect is
what some hedge funds are also doing.
But don't forget that
which means paying interest.
It's not free to do.
You could easily lose money waiting for that Tether
crash to come, a crash that may never happen.
And I think, despite the shadiness,
a total Tether crash is unlikely.
At the end of the day, shorting
Tether is an all-or-nothing proposition.
There's not much upside or downside so long
as it stays pegged to the dollar.
But with all these hedge funds piling up
bets against Tether, you might be thinking,
What do they know that I don't?s
Well, maybe not that much.