A liquidity pool that allows swaps between the top 3 stablecoins including Circle (USDC), USDT and MakerDAO (DAI) said on Friday (July 1) that the reserve USDT accounts for 65% market share, indicating that investors are worried about the long-term prospects of holdings.
While CTO Paolo Ardoino stated that USDT unaffected by investors withdrawing $10 billion after TerraUSD (UST) collapsed, hoping to assuage fears of insufficient reserves, hedge funds have bet big on the value of USDT decreased since then. It fell to $0.95, considered a 'lost peg' event, shortly after UST crashed and its market capitalization dropped from $66,806,562,259 to $66,169,266,578 at the moment, $600 million this week.
USDT's market share for tokens in 3pool of Curve Finance was 29% on May 6, prior to UST's loss of peg, before rising to 82% on May 12, causing it to briefly lose its peg to the US dollar.
Institutions Short USDT
According to Jeff Dorman, Investment Manager at Arca, institutions have been betting on USDT losing their peg for a while using one of two strategies: Short or buy put options. Short involves borrowing USDT in a loan collateralized with Bitcoin and other cryptocurrencies. It can be sold and redeemed when the price drops and loses the peg, and the original borrowed USDT is returned to the lender. The institution then profits from the difference between the buying and selling prices.
In traditional stock markets, stock prices can theoretically rise indefinitely, which means that the person setting a short can lose a lot of money. With a stablecoin, the possibility of exceeding the dollar rate is very low, limiting the risk to the institution.
Companies can also buy put options, which allow the USDT to be sold later, i.e. when the price falls, for maximum profit.
Hedge Funds Continue to Short USDT
From May 27, 2022 to June 27, 2022, the number of Short USDT hedge funds through Genesis Global Trading Inc., a crypto brokerage, increased. Leon Marshall, head of institutional trading at Genesis, the value of the transactions is in the “hundreds of millions of dollars”.
Cryptocurrency companies in Asia have been acting as counterparties to short-selling trades initiated by European and American hedge funds.
USDT announced to reduce its holdings of commercial paper in its reserve to $4 billion on July 2. Commercial paper is a form of short-term promissory note issued by companies. Their goal in reducing short-term commercial paper holdings is to give credibility to the claims about the reserve composition that back USDT. The reserve structure consists of different asset classes designed to support the value of USDT.