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More Hedge Funds Are Betting Against Tether as Crypto Melts Down
Professional investors got interested in shorting tether after the collapse of another stablecoin, TerraUSD
By Vicky Ge Huang of The Wall Street Journal
Short sellers have been ramping up their bets against tether, the world’s largest stablecoin, amid a broad market selloff that has called into doubt the financial health of some crypto companies.
In the past month, more traditional hedge funds have executed trades to short tether through Genesis Global Trading Inc., one of the largest crypto brokerages for professional investors. These trades are worth “hundreds of millions” of dollars in notional value, said Leon Marshall, Genesis’s head of institutional sales. He declined to be more specific.
“There has been a real spike in the interest from traditional hedge funds who are taking a look at tether and looking to short it,” Mr. Marshall said in an interview.
Tether is a stablecoin, which are virtual currencies that are supposed to be pegged to the dollar or other national currencies, and it is the most widely traded in the world. Tether’s market cap stood at about $67 billion on Friday, according to CoinMarketCap data.
Genesis, which doesn’t take a view on tether, said the short trades are almost exclusively put on by traditional hedge funds in the U.S. and Europe, while crypto firms—especially those based in Asia—have been happy to facilitate the other side of the transactions.
A number of investors have been betting against tether for at least 12 months. But more hedge funds got interested in shorting tether after the collapse in May of another stablecoin, TerraUSD, according to Genesis.
TerraUSD is a so-called algorithmic stablecoin, which means it doesn’t have to be backed by real assets. Other more traditional stablecoins, including tether, say they hold $1 of cash, Treasury bills or other traditional financial assets for each unit of stablecoin.
Tether briefly lost its peg during the TerraUSD collapse in May. It traded as low as 95 cents on May 12, reflecting investors’ concerns about the value of its assets and whether they would be readily convertible to cash in a market panic. It has since recovered and is now close to $1.
There are two main factors driving hedge funds to short tether, Mr. Marshall said, citing conversations that he has had with clients.
Some hedge funds are shorting tether as a bet about the broader economy. The Federal Reserve is raising interest rates to curb 40-year-high inflation, scaring investors away from riskier assets including cryptocurrencies.
Other hedge funds are concerned about the quality of the assets backing tether. Tether says it maintains an equivalent amount of reserves that include commercial paper—or corporate short term loans—bank deposits, precious metals, government bonds and digital tokens.
Tether has faced intense regulatory pressure over its reserves. Tether and related entities reached an $18.5 million settlement in 2021 with the New York attorney general’s office, which accused them of making several public misrepresentations regarding the dollar reserves backing tether. They didn’t admit or deny the allegations.
Some short sellers say they believe that most of tether’s commercial-paper holdings are backed by debt-ridden Chinese property developers, The Wall Street Journal previously reported. Tether said in a blog post this month that “these rumors are completely false.” The company added that it has been reducing its portfolio of commercial paper.
A tether spokeswoman said the firm wouldn’t comment further on “how hedge funds are looking to generate returns by creating arbitrage opportunities on the basis of these rumors.”
Tether’s market cap has been declining since it briefly lost its $1 peg. It is down about $16 billion since a peak on May 5, according to CoinMarketCap data.
USD Coin, the largest stablecoin after tether, added more than $7 billion in market value during the same period.
