Tether ($USDT) Under THREAT! Can The Stablecoin Survive This Time?

Controversial stablecoin Tether ($USDT) is frequently making headlines concerning the lack of transparency, the reserves backing it, and the inefficiency of its executives to proceed with an independent audit from a top firm.

It is quite possible for Tether ($USDT) to face serious issues soon, as new reports suggest hedge funds are targeting the stablecoin’s viability and massively betting against it using the Genesis Trading prime broker.

The financial world considers the recent collapse of stablecoin UST and the insolvency of multiple funds and exchanges with funds currently betting or hedging against the ability of USDT to maintain the peg.

Tether’s CTO, Paolo Ardoino, published a Twitter thread expressing his view on the pilling up of shorts against Tether ($USDT).

Genesis Trading provides a custodial trading domain and operates as a regulated financial entity in the US. Genesis is a subsidiary of the Digital Currency Group (DCG), a behemoth in the crypto market. Another subsidiary of DCG is Grayscale.

Hedge Funds Targeting Tether

Wall Street Journal lately presented how hedge funds are betting against USDT, shorting the stablecoin using the Genesis platform.

Genesis Trading (A DCG company) And The Tether Shorts

Genesis Trading is an institutional-only trading platform for digital assets, offering “prime” financial services. The platform demands a minimum net value of $10,000,000 to sign up, while the minimum trade order stands at $250,000.

In this 20 minute interview with Michael Saylor, Genesis CEO Michael Moreau explains the platform and its capabilities:

However, we recently discovered that Genesis also faces difficulties and dealing with exposure at the size of one hundred million dollars to insolvent crypto funds 3AC and Babel Finance, as reports suggest.

The current sentiment in the crypto market is described as extreme fear, as even massive investing platforms like Genesis follow the rest crypto custodians into liquidity uncertainty.

While CME, Bakkt, and more regulated futures markets operate Bitcoin Futures (CME also offers Ethereum), for the rest of the digital assets, Genesis is a popular choice (for funds and institutions).

Tether ($USDT) stablecoin maintains a peg of 1:1 with the dollar. To sustain this peg, Tether holds assets representing the exact market cap of USDT. The market cap represents the total number of stablecoins in circulation, yet this number may vary over time according to issuances and redemptions of USDT.

According to WSJ, $USDT shorts are piling up in the Genesis broker, as the controversial stablecoin is considered a prime candidate to follow UST in de-pegging and imploding.

Between an algorithmic stablecoin and an asset-backed one, there are fundamental differences. $USDT is (supposed to be) backed by assets representing 1:1 of its market cap.

The main issue with Tether is that analysts and investors (in and outside of the crypto industry) have to rely on the promises of Tether executives concerning the validity of their reserves, as Tether has never proven it holds enough assets to back the stablecoin.

Perpetual Futures: The Perfect Attack Vector

According to Tether’s CTO Paolo Ardoino, powerful funds engage in a hostile attempt to bring Tether down.

Mr. Ardoino explains how funds attack crypto assets using these methods in a recent thread he published on Twitter, although, as usual, official Tether tweets leave a lot to be desired.

Aside from the typical condemnation of critics characterizing them with derogatory names, the above Tweet is yet another message from Tether that inspires no confidence concerning the current state of the cryptocurrency market.

Calling criticism as FUD (Fear Uncertainty Doubt) was the defensive line for every crypto fund and centralized platform that recently collapsed (Celsius, BlockFi, Terra Luna).

The Secret Sauce: Perpetual Futures As Financial Weapons

According to Tether’s CTO, perpetual future instruments (USD/USDT) offered by Galaxy Trading are ready to destabilize DeFi markets, depeg Tether, and rebuy tokens at a lower price.

Paolo Ardoino mentions tools that so far with the help of USDT (lending) have been used against other cryptocurrencies:

• Perpetual futures USDT/USD (in Galaxy Trading)

• Spot short selling

Buying back the USDT tokens (delivering the underlying traded assets in the futures contract) is not a condition in perpetual futures (USDT/USD).

If Tether ($USDT) falls and losses a significant percentage of its peg, it will immediately create a domino effect of liquidations throughout all DeFi and CeFi exchanges. Trust will vanish, with nobody willing to buy USDT tokens at any price.

The only mandatory purchases will be traditional futures contracts that settle in USDT. However, perpetual futures don’t work like that.

Depending on the market, perpetual futures settle in a predesignated currency. Regardless, when shorting USDT with USD, it would be unreasonable to perform such a trade using USDT as the settlement currency, since USDT will have no chance to recover. Shorts enter USDT/USD to settle in UST when they close.

We already have the UST example (which never recovered) as centralized stablecoins demand trust (of the market). Maybe Tether assumes it can vastly depreciate and still regain the trust of the market.

No plan will work once Tether USDT depegs significantly. It is a trust-based centralized token, and trust (or centralization) is its single point of failure.

Considering perpetual futures, this is a financial instrument only found in the cryptocurrency markets.

Perpetuals don’t require exposure to the underlying asset, and upon closing the trading position, they are settled in the currency the exchange sets, which in this case would be the dollar (USD).

Thus, in a USD/USDT position, USDT is not delivered when the trader closes their positions.

The trader does not purchase USDT to short (or long) it, so the exchange is not required to sustain the reserves of the asset in question.

This financial instrument is just a bet and nothing else. A secondary market that a big player can manipulate by borrowing and dumping massive volumes in the spot market.

Perpetual Futures are indeed the perfect attack vector.

Read more about perpetual futures in the cryptocurrency market, here:

Paolo Ardoino is aware of how USDT is used in the cryptocurrency market to attack cryptocurrencies since these shorts using perpetual futures are used in this approach in his own exchange, Bitfinex.

Galaxy Trading offers numerous financial options concerning digital assets such as OTC trading, derivatives, perpetual futures, borrowing/lending business, and custody business.

Tether Burns More USDT

After the collapse of Terra Luna and UST, we also witnessed large-scale destabilization in Tether (USDT):

• The temporary destabilization and de-pegging of the top stablecoin (Tether) and

• A massive reduction of USDT’s market cap by 20% with 16 Billion USD in token redemptions (according to Tether)

In the month following the collapse of Terra Luna and UST stablecoin, Tether ($USDT) has reduced the total amount of tokens in circulation by 20%, effectively lowering its market cap to $66 billion from an all-time high of $82 billion.

Paolo Ardoino (CTO of Tether & Bitfinex) presented the reduction in USDT in circulation as the result of massive USDT redemptions processed by Tether.

Tether slightly depegged right after the collapse of UST stablecoin. On June 13th, Tether was trading at $0.97, a 3% destabilization of the 1:1 peg to the dollar.

Conclusion

The vast increase of Tether’s market cap between 2020 and 2021 and the lack of transparency are the two primary reasons casting doubts on its ability to sustain its dollar peg.

However, there should be a mention considering Tether’s high resilience and the ability to keep the peg stable on average at an 1:1 rate with the dollar for years.

Still, the operational terms of any financial institution based on “trust” or a trusted environment are always highly susceptible to abuse of this trust. Tether has reached a significant market cap ($66 billion). The management may require adjustments, interventions, and regulation commitments that Tether may find challenging to produce.

As the bets against Tether increase, we will rediscover the sustainability of stablecoins in this market, the soundness of market counterparts (exchanges, custodians, funds), and perhaps realize how prices are affected by the stablecoin.

Cover Photo by “DeSa81" On Pixabay (modified)

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