A $4 Billion Hedge Fund Is Shorting Tether's Stablecoin

By Scott Chipolina

Fir Tree Capital Management, a $4 billion hedge fund, is shorting Tether as the largest stablecoin in crypto faces down scrutiny from regulators. 

According to clients of the firm and reported by Bloomberg, Fir Tree has constructed a way to short Tether in an “asymmetric trade.” In other words, the risk is minimized and the potential to generate profit—the firm’s clients reportedly say—remains high. 

The hedge fund is also reportedly betting that its decision could generate a profit within 12 months. The firm’s concerns center around the stablecoin provider’s $24 billion in high-yield commercial paper, which the firm also believes is linked to Chinese real estate developers. 

Chinese real estate has been facing down a debt of its own, led by China Evergrande Group, whose liabilities exceeded $300 billion in December 2021, when it missed a debt payment deadline. 

While Tether—the company—says it does not own any commercial paper linked to Evergrande, Bloomberg reports that Fir Tree expects some of the commercial paper Tether does own will lose value. 

Investors reportedly said this could cause a potentially large drop in the reserves held by Tether. 

Tether’s reserves

Tether’s latest quarterly assurance opinion—published last month—showed a 21% decrease in commercial paper holdings over the last financial quarter. 

In May last year, Tether released a breakdown of its reserves for the first time since 2014. As of March 2021, the company said almost 76% of the stablecoin’s reserves were held in cash or cash equivalents. 

In this category, commercial paper held the majority share of 65%. 

Despite previously claiming that Tether was backed 100% by cash, the company’s breakdown of reserves at the time showed that less than 3% of Tether reserves were actually held in cash. 

In August 2021, another assurance report found that Tether had a total backing of $62.7 billion. A total of $30.8 billion of this was made up of commercial paper. 

In October last year, the United States Commodity Futures Trading Commission hit Tether—the company—with a $41 million fine for lying about its dollar reserves.

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