Short Sellers Are Betting Crypto’s Central Bank Tether Is Vulnerable To A Run

Short sellers are betting against a cryptocurrency whose price is not expected to move.

A few investment firms, including Fir Tree Partners and Viceroy Research LLC, have been betting in recent months that the tether’s price will fall, according to people familiar with the matter. Tether is the most popular currency for bitcoin trading and is supposed to have a fixed value pegged to the US dollar.

Some hedge funds have run tether shorts with Genesis Global Trading Inc., one of the largest crypto brokerage firms for professional investors, said Matt Ballensweig, co-director of trading and lending at Genesis. About a dozen funds have considered doing the same with Genesis, but many have not moved forward, Ballensweig said.

With approximately $82 billion in circulation, tether is the world’s largest so-called stablecoin, a digital asset pegged to the dollar and backed by cash reserves or other financial instruments.

The short sellers follow a group of regulators, lawmakers, prosecutors, plaintiffs’ attorneys and amateur sleuths who have spent months, and in some cases even years, trying to uncover details about a cryptocurrency. whose use has far exceeded its transparency.

Tether is not a household name, but it is a cornerstone of the crypto ecosystem. Traders on major exchanges often use tether as an easier way to buy crypto than through bank accounts or wire transfers.

A Tether spokesperson said short sellers appear to be involved in a “clever scheme to raise capital from the less knowledgeable, leveraging misinformation with the end goal of collecting management fees.”

“Tether has been tested time and time again and has been adopted with flying colors. During such events, its peg remained strong, all redemptions were honored, and even the trade price remained stable,” the spokesperson added.

This price stability — tether hasn’t traded below 0.999 cents against the US dollar in the past year — means that bets by short sellers have yet to pay off. And most of Genesis’ original customers have since exited the original transaction, Genesis said, although some investors have wanted to discuss ways to shorten ties in recent weeks. The Fir Tree short was reported earlier by Bloomberg News.

Short sellers are betting the $82 billion portfolio that underpins Tether’s value, now the size of a large money market fund, is at risk of losses the parent company has not disclosed, according to some of the people familiar with short positions. .

Tether releases new tether tokens when it receives a corresponding dollar amount from customers. It then invests this proceeds in reserves that back the tokens, a portfolio that includes both safe investments, such as cash and short-term US government securities, and riskier investments, including IOUs. term called commercial paper, secured business loans and other cryptocurrencies.

Tether’s opacity, combined with its rapid growth, has also made it a frequent topic of conversation in Washington. The Commodity Futures Trading Commission discovered last year that Tether only held equivalent dollar reserves in its accounts for just over a quarter of days for a period of around two years, leading Tether to conclude a $41 million settlement with the regulatory agency. Tether has neither admitted nor denied wrongdoing in its settlement with the CFTC.

An expanded version of this story appears on WSJ.com.

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