How To Short Tether (USDT) | Credit: Shutterstock
Key Takeaways
- Tether is the largest stablecoin pegged to assets, and aims to offer stability and liquidity in the crypto market against volatility of crypto assets.
- Tether claims to be backed by cash and cash equivalents, Bitcoin, amongst other assets, but concerns about backing persist.
- Shorting USDT is a strategy to profit from its potential decline, using borrowing and selling tactics.
- Shorting USDT involves risks like interest rates, market volatility, and regulatory factors. However, if done correctly offers opportunities to make successful trades.
What is Tether (USDT)?
Tether (USDT) is the world’s largest stablecoin, to date, designed to bridge the gap between the digital and the traditional financial worlds. USDT has been a prominent stablecoin since its inception in October 2014, aiming to maintain a 1-to-1 peg with the US Dollar. Despite its intended stability, USDT’s value has exhibited notable deviations from the $1 mark over the years.
Tether’s reserves consist of 85.05% in Cash & Cash Equivalents, 0.13% in Corporate Bonds, 3.78% in Precious Metals, 1.94% in Bitcoins, 2.73% in Other Investments, and 6.36% in Secured Loans. Among these, 75.86% is in Cash & Equivalents, with U.S. Treasury Bills, Reverse Repurchase Agreements, and Money Market Funds contributing the rest.
Backing And Stability Concerns Of Tether (USDT)
While it often remains near $1, there have been instances where its price surged to thousands or dropped below a dollar to cents, affecting traders and investors along the way. Over the years USDT has been a subject of scrutiny, questioning reserves and market stability. Tether claims to be backed by an equivalent amount of real-world assets, primarily the US Dollar. However, skepticism within the cryptocurrency community regarding whether Tether truly maintains a 100% backing is often discussed in the industry.
Even though Tether provides a daily audit of their holdings to battle said skepticism that surrounds it. The stablecoin USDT holds depegging risks due to factors that might include:
- Market demand and supply imbalance: If the demand for a stablecoin like USDT significantly exceeds its supply, its price might temporarily rise above the peg. Conversely, if supply surpasses demand, the price might fall below the peg.
- Market volatility: If the cryptocurrency market experiences high volatility, it can lead to rapid price fluctuations in stablecoins as well. These fluctuations can cause temporary deviations from the peg.
- Regulatory concerns: Regulatory uncertainty or negative legal developments can lead to instances of depegging events.
- Liquidity issues: If there are liquidity problems within the stablecoin’s ecosystem, it might become difficult to maintain the peg. Lack of liquidity can cause price deviations.
- Transparency and reserve concerns: If concerns surrounding the adequacy of the reserves that back the stablecoin come into question or if the issuer fails to provide transparent information about said reserves, it may lead to an erosion of confidence leading to a depegging event.
- Market Manipulation: Just like any other asset, stablecoins can be subject to market manipulation. Large trades or coordinated actions can temporarily impact the price and lead to depegging.
USDT’s history highlights the challenges of maintaining a stable peg in the volatile cryptocurrency market. Tether can be traded on exchanges offering smoother trading experiences and fostering broader adoption of blockchain-based assets.
A History Of Tether (USDT) Depegging
There have been several instances where the USDT value has deviated from the intended $1 price. For instance, around October 15, 2018, negative sentiment led to a Tether token sell-off, dropping USDT value below $1. This could be linked to Tether and Bitfinex cutting ties with Noble Bank.
Additionally, on June 15, 2023, USDT slightly deviated from its peg, falling 0.3% to 0.997 due to Curve’s 3 pool imbalance, increasing USDT’s pool share. The below chart identifies time periods where USDT had significantly depegged by 10% or more from the 1-to-1 ratio.
2019
May 2019: Tether traded at $1000 on Kraken
Sep 2019: Tether traded at $390 on Kraken
Why Short Tether (USDT)?
Shorting is a common trading strategy, involving betting on the decline in value of an asset, such as a cryptocurrency like USDT. In the context of USDT, shorting entails borrowing USDT tokens or taking a holding of USDT and selling them at the current price, and repurchasing them later at a lower price to return to the lender.
This allows investors to profit from a potential drop in USDT’s value. As a safeguard against USDT depegging, some investors consider shorting USDT, although this strategy comes with challenges.
Reasons For Shorting Tether (USDT)
- Market sentiment: An investor may decide to short USDT if they think that the market’s attitude toward it is deteriorating as a result of scandals, regulatory worries, or a perceived lack of transparency.
- Doubts on reserves: Despite the fact that USDT is frequently tied to the US dollar, there have been questions about whether Tether has adequate reserves to support all of the active USDT tokens. An investor may choose to short USDT if they believe it may not have sufficient backing.
- Trading on speculation: Traders may also short USDT as part of a larger trading on speculation strategy, hoping to profit from momentary price swings.
Steps To Shorting Tether (USDT)
Shorting Tether using DeFi protocols like AAVE involves borrowing USDT and then converting it into other stablecoins, with the anticipation that Tether might experience a depegging event or lose its value relative to other stablecoins. Here’s an overview of the steps one might take:
- Research and analysis: Research the current state of Tether, recent developments, and potential factors that could impact its stability.
- Access a DeFi platform: Choose a reliable DeFi platform that supports borrowing and lending stablecoins.
- Deposit collateral: To borrow stablecoins, you typically need to provide collateral. This could be another cryptocurrency, such as Ethereum (ETH) or Wrapped Bitcoin (WBTC). The amount of collateral you provide will determine how much you can borrow.
- Borrow USDT: After providing collateral, borrow USDT from the DeFi platform.
- Conversion to other stablecoins: Convert the borrowed USDT into other stablecoins that you believe might be more stable or less prone to depegging. Examples of stablecoins one might consider include USDC, DAI, or BUSD.
- Repay borrowed stablecoins: When you decide to close your short position (either due to the desired price movement or to manage risk), you’ll need to repay the borrowed stablecoins, including any interest accrued.
- Manage risks: Shorting any asset, including stablecoins, carries risks. If Tether remains pegged or appreciates in value, you could incur losses.
- Fees and interest: Keep in mind that using DeFi platforms involves fees and hence the individual will need to pay interest on the borrowed stablecoins for the duration of the position.
Important Considerations While shorting Tether (USDT)
There are several considerations to keep in mind when evaluating the costs and potential earnings of shorting Tether using borrowed USDT on a DeFi platform like AAVE or shorting USDT in general. Here are some points to consider:
Interest Rates
Borrowing stablecoins, including USDT, from DeFi platforms often comes with interest rates that can be relatively high. These rates can eat into potential profits and may even exceed the gains from shorting if the market doesn’t move in one’s favor quickly enough.
Market Volatility
Cryptocurrency markets are highly volatile, and the value of stablecoins can fluctuate. If the market moves against a short position, the value of the collateral may decrease, leading to a possible liquidation position if it falls below a certain threshold. This can result in losses and potentially even lose the entire collateral stake.
Opportunity Cost
While adopting collateral for borrowing, one may miss out on other investment opportunities in the market. If those opportunities yield higher returns, the person shorting USDT could be better off pursuing other shorting opportunities with a limited capital resource instead.
Unpredictable Timing
Predicting when or if a depegging event will occur can be extremely challenging. The individual might need to maintain a short position for an extended period, which could lead to higher interest payments and more risk exposure.
Counterparty Risk
DeFi platforms are built on smart contracts, and there’s always a risk of bugs, vulnerabilities, or even hacking incidents that could result in financial loss.
Regulatory And Legal Considerations
Depending on the jurisdiction, shorting cryptocurrencies and using DeFi platforms might have legal and regulatory implications. Before entering into any shorts the investor or trader should comply with the laws of the country and be aware of potential tax implications that might follow.
Monitoring And Active Management
Successfully shorting Tether involves continuous monitoring of the market and the stablecoin landscape. It is important that once a strategy shortens the stablecoin the trader or investor remains informed about market trends, news, and any events that could impact the value of Tether.
Limited Upside Potential
The potential earnings from shorting are capped by the extent to which Tether’s value falls. On the other hand, losses can theoretically be unlimited if Tether’s value appreciates significantly or if the market moves against a short position.
Emotional Stress
Shorting is a high-stakes strategy that can lead to emotional stress, especially in a volatile and unpredictable market. It’s important to have a clear risk management strategy and the emotional discipline to stick to it.
Interest Calculation
Interest on borrowed stablecoins accumulates over time. Before making any moves, calculate the potential total cost of interest payments based on the expected holding period.
Strategies To Protect Against Shorting Risks
Navigating the decision-making process of shorting Tether, or any speculative investment requires understanding of key strategies to make informed decisions. Here are some protective measures to consider:
- Define one’s goals: Clearly outline any investment goals, whether it’s short-term profit, risk mitigation, or diversification. Identify key areas of interest such as prior levels the price of USDT has visited in the past.
- Risk-reward ratio: Compare potential gains against the risks being taken. A higher potential reward should justify the level of risk being exposed to.
- Financial prudence: Consider how much of the overall portfolio one is willing to allocate to this strategy. Avoid investing more than can be afforded to lose.
- Diversification: Avoid putting all the capital into a single strategy or trade. Diversification across different asset classes can help mitigate against risk.
- Exit strategy: Define a clear criteria for exiting the trade. Understand what price movement or time frame will trigger an exit or entry point to make informed decisions
- Risk management: Set stop-loss orders or other risk management measures to limit potential losses should the price appreciate when the trader is anticipating a short.
- Start small: Start with a small portion of the portfolio to test the waters and to gain invaluable experience.
- Emotional discipline: Maintain emotional discipline. Don’t let fear, greed, or impatience drive any hasty decisions.
- Know when to walk away: If the market doesn’t move as anticipated or if any risk tolerance changes, be willing to close a position and cut any losses incurred if necessary.
Conclusion
Despite the advantages of shorting, it is essential to remember that engaging in trading strategies involving USDT, within the context of the speculative cryptocurrency market, carries substantial risk. The value of USDT and its stability can be influenced by a variety of factors, and there are no assurances of profit.
As with any investment, the outcome remains uncertain, underscoring the significance of thorough fundamental research, careful risk assessment, and alignment with one’s individual risk tolerance before considering any positions involving USDT Tether or any other cryptocurrency for that matter.
John Maynard Keynes, a renowned economist once said “Markets can remain irrational longer than you can remain solvent”.
This quote highlights the idea that even if a market behaves in ways that seem illogical or irrational, traders or investors who bet against this irrationality can face financial challenges if the market’s behavior might not align with conventional wisdom or expectations. Always invest and trade with utmost caution.
FAQs
What is Tether (USDT)?
Tether is the largest stablecoin, pegged to assets like the US Dollar and Bitcoin, providing stability and liquidity in the volatile crypto market.
Why Short Tether (USDT)?
Explore the rationale behind shorting Tether, involving borrowing and selling USDT to profit from potential value drops, market sentiments, and trust issues.
How to short Tether (USDT)?
One can short Tether’s value using strategies involving borrowing and selling USDT at the current price, aiming to buy back at a lower price for profit.
What are the risks involved in shorting Tether (USDT)?
Shorting Tether (USDT) carries the risk of potential regulatory changes, counterparty risk, and sudden market volatility.
