More Hedge Funds Are Betting Against Tether as Crypto Melts Down [WSJ]

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.