Huobi Research
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Huobi Research

Will USDT be the next stablecoin that collapses, just like UST did?

Authored by Eno Zhang, Fubing Yang, Kou Jer Shun, Researchers at Huobi Research Institute

Abstract

This week, we focus on the following events: 1) Crypto Hedge Fund Three Arrows Capital Was Ordered to Liquidate; 2) Entrepreneur First Completes US$158 Million Series C Funding, Will Invest in Web3 and Other Fields; 3) U.S. SEC Has Rejected Grayscale Spot Bitcoin ETF Application; ___________________________________________________________________

Project Analysis: Tether’s USDT lost its peg to the US dollar briefly when Terra’s UST imploded. Hedge funds are now shorting BTC using futures contracts as well as Decentralised Finance applications (DeFi). Will USDT be the next stablecoin that collapses?

1. Industry overview

I. Overall market trend

Prices of cryptocurrencies have been trending upwards in the past week. Bitcoin hit close to US$22,000 over the weekend and is currently trading at US$20,355, a major improvement from the US$17,500 that we witnessed early this month. Ethereum likewise saw a big jump back to US$1,200 and is currently trading at US$1,152. Altcoins are currently in the red as BTC dropped from its US$22,000 high last week. ADA and XRP fell 3.5% while SOL dropped 4.5% as the hype around its upcoming Saga mobile phone eased.

While Bitcoin and Ethereum have risen from their recent low of US$17,500 and US$880 respectively, we believe that this might potentially be a bull trap and investors should be cautious as we may witness a further drop given the ongoing macroeconomic uncertainty. The war in Ukraine, rising interest rates and rising inflation all signal that we have yet to see the worst. There is likely to be another sell off in the cryptocurrency market. Martin Hiesboeck, head of blockchain and crypto research at Uphold, says that whether BTC holds above US$20,000 has little to do with BTC itself and more with the overall geopolitical and macroeconomic situation which many believe will not improve in the near future.

II.NFT

While Ethereum has plunged more than 80% since November 2021 and weekly NFT sales have fallen below US$200 million from over US$1.8 billion in August, there is still optimism in the market as evident from the 15,000 people who registered to listen to the 1500+ speakers at the NFT.NYC event that was held recently. Magic Eden, a marketplace which allows its users to create, buy and collect NFTs has recently raised US$130 million in new funding, bringing its valuation to US$1,6 billion, attaining unicorn status. This tells us that investors still believe in the NFT market in the long run despite the current crypto market dipl.

The NFT market has an estimated aggregate market cap of US$41 billion and has exhibited weakness alongside other risky assets. Amongst the top collections, the Bored Ape Yacht Club floor price has had a 64% year-to-date decline from approximately US$270,000 to US$98,000. CryptoPunks and Mutant Ape Yacht Club (MAYC) have declined 70% and 66% YTD respectively as well.

III.DeFi

IV.Layer 2

3. Market news

I. Industry news

Grayscale GBTC has a Negative Premium of 28.46%, and The Number of Coins Held Is 638,500 BTC

According to Coinglass data, Grayscale Bitcoin Trust has a negative premium of 28.46%, holding 638,500 BTC, with a value of US$12.949 billion. Ethereum Trust has a negative premium of 30.2%, ETC Trust has a negative premium of 60.29%, LTC Trust has a negative premium of 44.72%, and BCH Trust has a negative premium of 16.67%. The U.S. SEC has rejected the Grayscale spot Bitcoin ETF application, and Grayscale’s CEO has said that the Trust has filed a lawsuit against the U.S. SEC.

Crypto Hedge Fund Three Arrows Capital Was Ordered to Liquidate

A British Virgin Islands court has ordered the liquidation of Singapore-based cryptocurrency hedge fund Three Arrows Capital, adding to the crisis sweeping the global digital asset industry, Sky News reported. Crypto industry insiders said Wednesday that the liquidation will be a momentous moment in the current unraveling of the cryptocurrency industry, which has grown at an alarming rate in recent years. It is unclear what immediate financial impact the liquidation will have on Three Arrows’ creditors. But the company’s collapse could raise further questions about regulatory oversight for cryptocurrencies and other digital assets in the world’s major financial centers.

The Total Amount of NFT Transactions On The Solana Chain Exceeded US$2.7 billion, A Record High

According to the latest data from CryptoSlam, the NFT transaction volume on the Solana chain has exceeded US$2.7 billion, which at the time of writing this article is US$2,702,776,099, and the total number of transactions on the chain has reached 8,547,947.

II. Investment and Financing

Entrepreneur First Completes US$158 Million Series C Funding, Will Invest in Web3 and Other Fields

Entrepreneur First, an investment fund, announced the completion of a US$158 million Series C round of financing. Many people in the technology industry participated in the investment, including Stripe co-founder John Collision, LinkedIn co-founder Reid Hofman, and Certific co-founder Taavet Hinrikus. It is reported that the fund was established in 2011 and focuses on investment in financial technology, D2C, Web3 and creator tools.

Blockchain Fintech Company PolySign Raises US$53 million In Series C Funding

PolySign, a blockchain financial technology company, has completed a US$53 million Series C round of financing. Investors include Cowen Digital, Brevan Howard, GSR Markets, etc. In addition to this, PolySign has also secured a US$25 million line of credit from private equity firm Boathouse Capital. PolySign provides institutional-grade infrastructure to investors through its subsidiary, Standard Custody & Trust Company, and fund management through PolySign’s recently acquired MG Stover Company.

Blockchain Technology Company Circulor Completes US$25 million Series B Financing, Led By Westly Group

British start-up Circulor on Tuesday announced the completion of a US$25 million Series B round led by Westly Group, with participation from Volvo Cars, Jaguar Land Rover (JLR) and the venture capital arm of BHP Billiton Group. Circulor has raised a total of US$45 million over the past two years. Funds from this round will be used for expansion, primarily in the U.S. market. By leveraging blockchain technology, Circulor is working with Volvo, JLR, BHP Billiton and TotalEnergies, among others, to trace its supply chain in pursuit of environmental, social and corporate governance (ESG) goals. Circulor CEO Douglas Johnson-Poensgen said Circulor plans to conduct an IPO “in due course.”

III. Supervision

U.S. SEC Has Rejected Grayscale’s Spot Bitcoin ETF Application

The U.S. Securities and Exchange Commission (SEC) on Wednesday rejected Grayscale’s application to convert its US$13.5 billion Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF. The SEC said in its filing that the applicatoin failed to answer SEC questions about preventing market manipulation, among other concerns. In addition, Bitwise’s application for a spot Bitcoin ETF was also rejected by the SEC.

European Council To Set Up Anti-Money Laundering Agency (AMLA) To Oversee Crypto Firms

The European Council on Wednesday agreed on some of its positions on a proposal to launch a dedicated anti-money laundering agency (AMLA) to oversee certain crypto asset service providers, or CASPs. It is reported that AMLA was first proposed in July 2021 and is scheduled to start operating in 2024. The agency will be one of the first regulators with the power to oversee money laundering in much of Europe, coordinating with countries’ financial intelligence units and cooperating with local regulators.

EU Policy Decides Not To Subject Most Transfers to Non-custodial Crypto Wallets to AML Checks

The European Union has agreed on anti-money laundering (AML) rules for crypto transactions, with a policy decision to exempt most transfers to non-custodial crypto wallets from AML checks. EU lawmaker Ondřej Kovařík confirmed the provisional agreement in a tweet. “EU institutions have reached an interim political opinion on money transfer rules, which I believe strikes the right balance of reducing AML risks in the cryptocurrency industry without hindering innovation and overburdening businesses,” the tweet said.

4. Trending project analysis — Will USDT be the next stablecoin to collapse, just like UST did?

What is the current stablecoin climate like?

The mounting concerns about stablecoins are omnipresent following the collape of Terra’s algorithmic stablecoin, UST. The notorious UST debacle resulted in users selling off their assets, wiping out US$8 billion from UST as it lost its USD peg. This has unsurprisingly brought up questions as to whether there needs to be stricter and more comprehensive stablecoin regulations.

Regulators are mainly concerned about protecting retail investors, ensuring products like algorthimic stablecoins are safe for crypto investors and also whether there are broader financial stability concerns with them. Many have already made their intentions to regulate crypto more comprehensively known. U.S Treasury Secretary Janet Yellen has brought up Terra independently twice last week during separate congressional hearings on the Financial Stability Oversight Council (FSOC).

A spokesperson for the U.K government has also mentioned that they are ready to take further action on stablecoins and Britain’s plan to bring stablecoins within the scope of electronic payments regulations could result in stablecoin issuers, Tether and Circle becoming subject to supervision by the relevant authorities. There are also separate propsals in the European Union that would bring stablecoins under strict regulatory oversight.

How was USDT affected by the collapse of UST?

The UST fiasco also impacted USDT, as investors redeemed huge amounts of USDT when Terra’s UST imploded. According to CoinGecko, investors withdrew US$1.7 billion from Tether in a single week back in mid-June 2022 and the total market capitalization of Tether has dropped by over US$20 billion since mid-May 2022. It also lost its dollar parity on 12 May 2022 when it fell to US$.969, according to Coinbase, but has since gained back its peg.

Hedge Funds are shorting Tether’s USDT

According to a report by the Wall Street Journal, crypto-focused hedge funds are starting to short Tether (USDT) amid the bleak market outlook. However, there is also a spike in interest from traditional hedge funds looking to short USDT as mentioned by Leon Marshall, head of institutional sales at Genesis Global. These short positions by hedge funds are by no means small and are worth hundreds of millions of dollars, and include funds such as Fir Tree Partners and Viceroy Research. While there isn’t a clear picture as to why these shorts are occurring, such actions can likely be attributed to a few reasons.

Firstly, many have cited that Tether has not been transparent about the asset’s actual backing. Tether claims that the stablecoin is backed by fiat currencies, and equivalent asset investments such as commercial papers, bank deposits, bonds, gold and cryptocurrencies. It has refutesdall claims as to its lack of transparency, and maintains that it holds 100% of the backing. If its reserve backing is verifiably proven to be false, that would spell trouble for USDT and will most likely result in another UST-like debacle. When investors and traders all rush to exchange their USDT to USD and realize that Tether is unable to fulfil these orders, investors might be forced to sell off their other crypto holdings which will likely cause panic that might even spill over into non-crypto markets.

Secondly, some of these funds are using these shorts as a bet against the broader economy due to rising interest rates, in order to curb the current 40-year-high inflation and the prospect of an impending recession.

How are traders shorting USDT?

The bets against USDT are occurring mainly on two fronts, futures that are tracking USDT as well as liquidity pools on DeFi applications. Traders go on exchanges such as FTX and Binance to trade futures. USDT futures producst have seen more than US$65 million in trading volume in the past 24 hours, and the number of unsettled futures contracts have a total value of more than US$400 million as of 29 June 2022. On DeFi applications, traders short USDT by borrowing USDT and exchanging it for USDC. If USDT drops in value, the loan along with its interest can then be paid back at a cheaper price when traders swap USDC back to USDT, and the difference would then be the profit they can keep.

What does Tether think about this whole situation?

Paolo Ardoino, Chief Technology Officer of Tether is aware of the actions on the part of hedge funds and believes that they are trying to cause panic in the market after the collapse of UST. Ardoino mentioned, “It really seems from the beginning a coordinated attack, with a new wave of FUD, troll, armies, clwons, etc.” Even amidstt all the controversy, Tether is still the largest stablecoin with a market cap of US$66.3 billion, with USDC in its rear view mirror at US$55.8 billion. Ardoino also stated that “Tether is the only stablecoin that is proven with fire under extreme pressure”.

What does the future hold for USDT?

If the hedge funds manage to successfully cause Fear Uncertainty and Doubt in the market, we might witness an increase in the number of people and institutions shorting USDT.Traders will be naturally concerned if they will be able to cash out of Tether, and will be seeking out safer and more transparent stablecoins like USDC. While there are hundreds of millions being shorted, this amount is still relatively small as compared to the overall market capitalization of Tether, only time will tell if USDT is here to stay as most of the reasons as to why these funds are shorting are speculative in nature.

It is worth noting that Tether was previously found to have held sufficient reserves in its account for only a quarter of the sample period that spanned over 26 months between 2016 and 2018. This led to Tether paying a US$41 million fine to the Commodity Futures Trading Commision which conducted the investigation. This has definitely had an substantial impact on Tether’s reputation and is definitely a factor taken into consideration by the hedge funds shorting USDT.

5. Calendar of future popular asset events

I. NTF mint Calendar

Ⅱ. Token Airdrops

About Huobi Research Institute

Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016. Since March 2018, it has been committed to comprehensively expanding the research and exploration of various fields of blockchain. As the research object, the research goal is to accelerate the research and development of blockchain technology, promote the application of blockchain industry, and promote the ecological optimization of the blockchain industry. The main research content includes industry trends, technology paths, application innovations in the blockchain field, Model exploration, etc. Based on the principles of public welfare, rigor and innovation, Huobi Research Institute will carry out extensive and in-depth cooperation with governments, enterprises, universities and other institutions through various forms to build a research platform covering the complete industrial chain of the blockchain. Industry professionals provide a solid theoretical basis and trend judgments to promote the healthy and sustainable development of the entire blockchain industry.

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