A renewal of interest by traditional hedge funds in shorting Tether has highlighted the difficulty of betting against the stablecoin that serves as a foundation for much of the trading in the cryptocurrency market. At stake is not just Tether’s $80 billion market value, but also the vast array of trades facilitated by Tether in the crypto market.
Fir Tree Capital Management is making a substantial short wager on Tether, predicting it could pay off within a year, Bloomberg News reported last week, citing sources familiar with the matter.
For institutional investors, there are two main ways to put on the trade. First, a fund can borrow Tether from a market-maker, using other assets such as Bitcoin and dollars as collateral. It can than turn around and sell Tether, hoping to buy it back at a discount when Tether drops below its targeted one-to-one peg to the dollar and return it to the lender while pocketing the difference. Depending on the level of collateral, funds could pay up to 12% to borrow Tether, according to crypto firms.
Alternatively, hedge funds can turn to derivative products. For example, they can buy a put option, which gives them the right — but not the obligation — to sell Tether at a later date. If Tether breaks the peg and falls, the put option will be “in the money,” meaning the trade will be profitable.
“Tether puts are difficult to offer,” John Kramer, director of trading at crypto market maker GSR, said, adding that the offer ultimately is just binary options. “We often see interest to buy them. While we are able to price them, they do not trade much because it’s expensive insurance to buy.”