The Big Short Meets Crypto

The Big Short Meets Crypto

Date:

A $4 billion dollar hedge fund is about to go to war with an $80 billion dollar behemoth. The hedge fund Fir Tree has opted to place a bet against the stablecoin cryptocurrency Tether. According to clients of this hedge fund, an asymmetric bet has been placed against the digital asset, reported by Bloomberg. The instruments that were used to execute this transaction remain unclear at this time. However, the hedge fund believes it could lead to a significant return on a 12 month time horizon.

The premiere stablecoin asset has become the world’s largest crypto which shares a direct link to the United States Dollar. This stablecoin provides its users with on-ramps and off-ramps to a near infinite amount of digital assets in the cryptocurrency realm. If a utility like the world’s largest stablecoin were to tank in value, the knock-on effects would be seen across the digital asset space to a dire degree. Given the interconnected nature of Tether with other major digital assets, the consequences could extend well beyond the short term.

Investors pondering whether they should invest in Tether are questioning the validity of where those $80 billion dollars in value is sourced. Although Tether advertises itself as a direct link to the United States Dollar through algorithmically calculated pegs, serious questions have been raised towards the intrinsic value of Tether’s holdings. As of December 31st, 2021, commercial paper holdings were slashed down 21% to a face value of $24.2 billion from the September 2021 high of $30.5 billion. Speculation is mounting as to the connections that Tether has with Evergrande. Although Tether has stated that it has no commercial paper holding tied directly to Evergrande, it can still be questioned as to what paper can be connected tangentially to the leviathan of Chinese real estate development. The value of Evergrande has fallen swiftly, as defaults on loans they must service have gone unpaid.

Jeff Tannenbaum, founder of Fir Tree Capital Management, and his team are not the first to place this kind of bet. George Soros, and a few of his partners decided to short the Pound. The currency of the United Kingdom took a tremendous fall on September 16th 1992, now infamamously dubbed “Black Wednesday.” Soros and fellow speculators successfully shorted by realizing the British government could not fulfill the terms it had agreed to with the Exchange Rate Mechanism established with its European counterparts.

A similar pattern of unfulfilled obligations with Tether could be the central reason that Fir Tree is reportedly executing this short position. With this latest round of speculation, Tether is certainly making waves among investors in the digital asset world. It stands to reason that there will be tectonic shifts within the industry if Tether is disrupted. If Fir Tree has their way, the Titanic of cash reserve crypto could be heading for the iceberg of cash outs.

Liam Fegan
Liam Fegan
Lockheed Martin Financial Analyst since June of 2018. If you want a better life, raise your standards and don't compromise them.
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