How to short Tether USDT

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Tether is the largest stablecoin in the crypto space, with a market cap of almost $66 billion. USDC is close behind, with a market cap of around $55 billion.

Photo by Mariia Shalabaieva; edited by author

However, USDT used to have a bigger market cap than even that. Ever since the crash of the Terra UST stablecoin, there has been a huge pressure on USDT. In May, CNBC reported that over $7 billion worth of Tether had been withdrawn. This essentially means Tether took back the USDT coins and exchanged them for fiat dollars. You can read the full story here.

Backing of USDT

Unlike UST (Terra), USDT is supposed to be backed by real dollars. UST, in contrast, was backed by an arbitrage algorithm which failed spectacularly. But ever since Tether was founded, there have been rumors that the coin is not 100% backed. That would mean that a USDT token is not worth $1 at all. The company also started to post regular “attestations.” These show that a huge portion of their money was actually invested in commercial papers. That could spell catastrophe.

Tether also recently recovered about $1 billion in loans to Celsius. Celsius, as you remember, recently filed for bankruptcy following the collapse of Three Arrows Capital. For now, let us put aside the fact that a huge amount of money that was supposed to be backing their stablecoin was actually invested in a risky company. The recovered sum is currently in danger as well. According to this article from the Financial Times, it could happen that those funds can be reclaimed by Celsius due to their bankruptcy filing.

So all in all, we can see that Tether could potentially spell trouble for the crypto space.

Protecting against the risks of a USDT depeg

In order to protect against the risks of USDT collapsing, you have a few options. The most obvious choice would be to simply short USDT. That means profiting from Tether losing its peg to the US dollar.

If you try to short Tether, you will find that it is not that easy. Barely anyone offers the option to short USDT.

However, if we look at how “shorting” essentially works, we can do it ourselves. Shorting an asset works pretty easily.

  1. Borrow the asset
  2. Instantly sell the asset
  3. If the price of the asset decreases, buy back the asset and return it to the lender.

Example: Say we borrow 1000 USDT . We then instantly sell those USDT, let’s say for 1000 DAI. If the price of the Tether token actually decreases (aka. loses its peg) by 50%, we can then buy back our 1000 USDT for 500 DAI and repay the loan. In the end, we still own 500 DAI.

How to short Tether

So the easiest way to do so would be to use the DeFi protocol AAVE. Simply supply another stablecoin like DAI or USDC and borrow USDT. Then swap USDT for DAI or USDC and wait.

If USDT loses its peg, you will owe less than what you actually borrowed. The currency risks this way are very limited because you only use stablecoins for the process. If you choose to supply other crypto like Bitcoin, for example, you are running a risk of being liquidated if the price of Bitcoin drops too low.

Drawbacks

Easy, right? Well, there are some drawbacks you should be aware of. Borrowing USDT comes at a cost. Those DeFi protocols pay their suppliers at your interest rate. Usually, the interest rate of USDT is higher than that of other stablecoins. This means you will have to pay more interest on USDT than you earn by supplying, let’s say, DAI.

So essentially, you are betting on a catastrophe that might never happen. And all that time, you will be paying to keep your position alive.

Borrow APY for USDT is higher than supply APY for DAI and USDC.

Bear in mind that the supply and borrow APYs are also subject to change.

Conclusion

Betting against Tether is possible. But you should consider carefully if that is what you want to do. If a Tether depeg happens, you could earn big. If it does not, your earnings will bleed away.

Disclaimer: This is not financial advice. Make your own decisions and do your own research.

Thank you

For taking the time to read this story. I hope you learned something new!

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How to short Tether USDT was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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