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Since its early beginnings, Tether has gone from stablecoin to the lynchpin of the entire cryptocurrency industry, with Tether trading pairs on a more cryptocurrencies than any other stablecoin, it has become indispensable.
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In theory, shorting Tether’s peg seems like a relatively risk-free trade, but in practice can be far more complicated to execute – borrowing rates on Tether are expensive, and put options can be hard to find.
When Bloomberg first broke news of Fir Tree Capital Management taking substantial short bets on U.S.-dollar “based” stablecoin Tether, cryptocurrency markets responded with predictable indifference.
Tether has long been a background risk of plying cryptocurrency markets, acting as the first dollar-backed (it was initially) stablecoin that provided a means for traders looking to take a breather from the volatility of other cryptocurrencies.
But since its early beginnings, Tether has gone from stablecoin to the lynchpin of the entire cryptocurrency industry, with Tether trading pairs on a more cryptocurrencies than any other stablecoin, it has become indispensable.
As a stablecoin, Tether has been constantly dogged by controversy, first over whether its reserves were actually backed by real dollars (it’s not) and whether there was misappropriation of Tether’s reserves to bailout its closely-related (they have the same owners) exchange Bitfinex.
Last year, Tether entered into a settlement with the New York Attorney General’s Office to make quarterly reports on its reserves without necessarily admitting any wrongdoing.
According to Tether’s website, a breakdown of Tether’s reserves shows that 84.25% is backed by “cash and cash equivalents and other short-term deposits and commercial paper” but around 53% is commercial paper (a type of short-term loan).
Although Tether has previously claimed that it doesn’t hold any commercial paper in the troubled Chinese property developer Evergrande Group, there’s no real way to verify those claims or what sort of commercial paper that Tether holds.
But does it really matter anyway?
Not to most cryptocurrency traders.
While traditional hedge funds like Fir Tree Capital Management see an obvious win in betting against Tether, because if Tether breaks its peg and falls, their bearish put options will be in the money, Tether has rarely slipped its peg in the past despite being dogged by controversies.
A US$41 million fine by the U.S. Commodity Futures Trading Commission last year saw no drop in demand for the stablecoin, nor did the NYAG lawsuit.
If nothing else, increasing interest in cryptocurrencies, especially in the wake of Western sanctions against Russia will drive demand for Tether, rather than see it lose its peg.
Tether plays a significant role as an on-ramp to cryptocurrency markets, especially because cryptocurrency traders often don’t have access to the traditional banking facilities.
In 2017, the popularity of Tether soared amongst Chinese when Beijing banned the purchase of cryptocurrencies using cash and it remains a popular means to spirit capital out of places like China and Russia.
Periods which have seen an increase in cryptocurrencies have also seen Tether not only maintain its peg, but trade at a premium to the dollar it’s supposed to be backed by.
Even today, rangebound cryptocurrency markets haven’t precluded a premium for Tether.
In theory, shorting Tether’s peg seems like a relatively risk-free trade, but in practice can be far more complicated to execute – borrowing rates on Tether are expensive, and put options can be hard to find.
