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As concerns mount over the recent broader state of the crypto market, more hedge funds are also losing faith in Tether and directly shorting it.
A growing number of hedge funds are betting against stablecoin issuer Tether and are already executing trades to short the leading crypto. Several traditional hedge funds have recently decided to short Tether in trades reportedly worth hundreds of millions of dollars in notional value.
The intensity of short-selling trades amid a broader market selloff has raised some eyebrows. Genesis Global Trading Inc’s head of institutional sales, Leon Marshall, revealed the estimated amount, confirming that Genesis is the crypto broker fielding the shorts. However, he didn’t specify an exact amount. According to him:
“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.”
Genesis also said that the hedge funds losing faith in Tether are exclusively in the US and Europe. According to the leading crypto brokerage for professional investors, Asian-based crypto firms are still content facilitating Tether transactions. Furthermore, Genesis also revealed that more Western-based hedge funds became interested in shorting Tether after fellow stablecoin TerraUSD collapsed. Before this time, the number of investors and traders with waning faith in Tether had sustained for about 12 months, before increasing a notch.
Alleged Reasons for Waning Hedge Funds Faith in Tether
According to Marshall, from conversations with clients, there are two major reasons hedge funds are shorting Tether. First, some hedge funds are doing so as a bet on the broader economy. The shorting is a safe route to avoid the risky nature of crypto assets amid rising Fed interest rates caused by inflation. To curtail the current 40-year inflation high, the Fed has been consistently increasing interest rates.
According to Marshall, the second reason is the quality of its backing assets. As it stands, the USDT stablecoin issuer says that it has an equivalent amount of varied reserves. These include commercial paper, corporate short-term loans, bank deposits, precious metals, government bonds, and digital tokens.
Tether has come under intense regulatory pressure over its reserves. In 2021, Tether reached an $18.5 million settlement with the New York Attorney General’s Office. The office had alleged that Tether made numerous public misrepresentations regarding its dollar reserves. In the attorney general’s own words, Tether ‘unlawfully covered up’ financial losses. The stablecoin issuer settled the case without admitting to or denying the allegation.
A few Tether short-sellers also opine that the world’s largest stablecoin issuer has most of its commercial-paper holdings from questionable backers. These include faltering Chinese real estate developers bogged down by huge amounts of debt. However, Tether moved to debunk these allegations as “completely false,” according to the Wall Street Journal.
In other news, Tether announced plans to roll out a pound-pegged stablecoin in July last week. The stablecoin, GBPT, will be the fifth stablecoin from Tether, after USDT, CNHT, MXNT, and EURT.