Shorting the monopolist: how crypto winter affected the stability of USDT

On June 27, The Wall Street Journal published an article claiming that cryptocurrency hedge funds were actively increasing the number of short positions in centralized USDT stablecoin, citing negative news reports and, in particular, the collapse of the TerraUSD (UST) algorithmic stablecoin.

Journalists cite the words of Leon Marshall, head of institutional sales at Genesis Global Capital, a brokerage company, who estimates such deals to be worth hundreds of millions of dollars. It was through Genesis Global, according to WSJ, that traditional hedge funds opened short positions in May when the entire cryptocurrency market was falling following the collapse of UST. At that time, the USDT exchange rate briefly dipped below $1. However, if the algorithmic UST eventually did not survive the collapse to zero, the USDT exchange rate quickly regained parity with the US dollar.

Marshall notes that the “surge of interest” from hedge funds is generally related to the macroeconomic situation, but there are also those who question the availability or quality of assets in reserves that act as collateral for stablecoin.

Paolo Ardoino, CTO of Tether, the company that backs stablecoin, responded to the criticism in a series of tweets. He openly stated that he admitted the attempts by some hedge funds to cause further panic in the market using “a coordinated attack, with a new wave of FUD, troll armies, clowns etc.” Paolo described the ultimate goal of the attack as harming USDT liquidity and buying back tokens at a drawdown.

2/Tools: USDt/USD perps (the perfect attack vector that offers an asymmetric bet), spot short selling, DeFi pools unbalancing, ...Goal: create enough pressure, in the billions, causing ton of outflows to harm Tether liquidity and eventually buy back tokens at much lower price.— Paolo Ardoino (@paoloardoino) June 27, 2022

Ardoino noted that Tether reduced its commercial paper exposure to USDT from $45 billion to $8,4 billion, and said the company would increase transparency and cooperate with regulators as needed.

“Tether portfolio is stronger than ever,” Ardoino writes.

Stable competitor

Tether repeatedly had to publicly defend its reputation and refute rumors, but USDT has always maintained its status as the leader and the most preferred stablecoin for crypto market participants. However, amid the negative events of the last two months, including the collapse of Terra, the freezing of client funds by the Celsius trading platform and the court decision to liquidate the cryptocurrency hedge fund Three Arrows Capital, a competing centralized stablecoin — USDC from Circle issuer — began to gain momentum.

While USDT's market capitalization is down 19% from a record $83 billion at the beginning of May, USDC's capitalization has been showing growth in the same period, hitting a record $56 billion on June 25. This means that the supply of USDT has been rapidly declining over the past two months, which could indicate that large investors are exiting the asset amid a market decline. Meanwhile, rising demand for USDC has led to an increase in the supply of the stablecoin from Circle.

Since June 15, the market capitalization of USDC has literally set new records every day. On June 21, the difference in capitalization with USDT narrowed to $12 billion, a figure not seen in the market since the fall of 2020. As of June 29, USDT and USDC are capitalized at $67,07 billion and $53,85 billion, respectively.

The number of USDT coins in circulation has fallen by $15 billion since early May. As UST collapsed and panic grew among investors over the fate of other stablecoins, USDT holders sold $7 billion worth of tokens. It seemed that any of the existing stablecoins were at risk, especially when USDT briefly lost its peg to the dollar.

At the time, Ardoino, speaking to Decrypt reporters, said that Tether could handle such sales “without blinking an eye,” and that this only confirmed the liquidity and real reserve holdings in the USDT collateral.

Secured by real currency reserves, centralized stablecoins quickly asserted their status as more reliable than algorithmic ones. When the UST's depegging from the dollar occurred, Circle's chief strategist Dante Disparte spoke disparagingly of “instruments masquerading as stable” in the company's blog. He also noted that those looking for real collateral in dollars and price parity between buyers and sellers should hold high-end assets operating within a regulated banking system.

Tether remains a monopolist

USDT and USDC remain dominant in their segment. The share of the two tokens in the total market capitalization of all existing stablecoins, according to CoinGecko, reaches 79% as of June 29. The third-largest stablecoin, Binance USD (BUSD), has a capitalization of $17 billion.

According to Nikita Zuborev, senior analyst at aggregator BestChange, of the 30 most popular exchange destinations in BestChange, half of the list includes USDT, while other stablecoins have never been on it.

“To understand the order of numbers, the traffic for USDT buying and selling direction in various blockchains exceeds that for USDC by about 65 times, while other stablecoins like DAI, PAX and UST do not even exceed the statistical margin of error to speak confidently about trends,” Zuborev explained.

According to the aggregator's statistics, over the last six months a surge in purchases and sales of USDT was noticeable only from the end of February to mid-May, with the peak in popularity of transactions involving Tether occurring just at the beginning of the scandal with the depegging of TerraUSD from the US dollar. At the same time, the number of requests to sell USDT exceeded the number of requests to buy by approximately twice, although the growth of purchases was also noticeable these days.

Relatively speaking, transactions related to stablecoins account for just over a tenth of all requests on the platform, which is quite significant given the variety of payment systems and cryptocurrencies available.

BestChange notes a steady increase in the popularity of positions to buy and sell Tether over the past six months, with no noticeable dips even amid the LUNA and UST scandal.

“The same cannot be said about stablecoin from Circle and Coinbase, at least some noticeable increase in interest in USDC was recorded in the period from late May to early June, but by quantity it is still only about two hundredths of the traffic associated with USDT,” Zuborev notes.

According to the BestChange analyst, in the current environment, Tether's stablecoin actually remains a monopolist in its segment and trust in it was not undermined even amid new scandals and the latest rumors about the project, so its position in the foreseeable future is unlikely to change noticeably, the expert believes. At the same time, the popularity of the BUSD stablecoin usage on the Binance exchange also continues to steadily take its market share, although even in such “greenhouse” conditions it is still far away from the volume of transactions with USDT.