Analyze the possibility of USDT explosion

Will USDT explode? Recently, it has been reported that hedge funds are shorting USDT in large quantities, with a scale of hundreds of millions of dollars. This article analyzes the possibility of USDT explosion.

Let’s take a look at the asset reserve components of $USDT. In fact, all stablecoin issuers’ asset reserves are similar to money market funds, and they are mainly cash and high-quality short-term notes.
Back in 2088, Reserve Primary, the largest money market fund at that time, had a size of $63 billion, and it held about $78 million in short-term bonds of Lehman Bank (only 1.2% of total assets).

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It was this insignificant exposure that caused the panic in the market
because the news of Lehman Brothers bankruptcy was too sudden, and Reserve Primary had no time to deal with Lehman’s short-term bonds, which no one wanted to buy or sell, and whose residual value could not be assessed. As a result, they have no way to assure investors that their 100 cents are equivalent to a dollar.

On 9/16/2008, Reserve Primary announced that there were only 97 cents left. It broke the public perception that the value of money funds is always $1.
This led to the most panic-stricken event in modern financial history. Investors pulled as much as $123 billion from money market funds over the next two weeks.

Due to the promise of 1:1 conversion, as long as the balance sheet is slightly flawed, it will trigger a chain reaction of runs. From this point of view, money market funds are highly similar to stablecoins.
To understand whether $USDT will explode, you must first answer two questions:
1. What is the liquidity of the $USDT asset reserve quality? 2. Is it possible for $USDT to experience a massive redemption wave like the money market funds in 2008?

Let’s talk about the first question first. The quality of $USDT asset reserves has been improving all the time. Half of the assets were originally CP (commercial paper), which was slowly replaced by T-Bill (US short-term government bonds).
CP vs T-Bill ratio
2Q21: 49%, 24%
3Q21: 44%, 28%
4Q21: 31%, 44%
1Q22: 24%, 48%

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The report for 2022Q2 has not come out yet, but according to Tether’s technical chief @paoloardoino, they redeemed another $8.4 billion in CP before 2022/3, and the USDT issuance before 2022/5 has not changed much. It is reasonable to guess that it is a rollover Going to other assets (most likely T-Bill), which means that the proportion of CP has dropped to about 13%.

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Aside from T-Bill, the quality of CPs held by USDT is also very good. The proportion of CPs rated above 3A has been increasing, and 3A-rated bonds can be said to be quite safe.
2Q21: 93%
3Q21: 96%
4Q21: 98%
1Q22: 99%

As the saying goes: action speaks louder than words. The best way to show liquidity is the stress test of a large number of redemptions. In the past month or so, USDT has been redeemed by 17 billion US dollars, and the circulation has decreased by 20% (83 billion –> 66 billion). Among them, 10 billion redemptions occurred in When the UST crashed and the overall market panicked (5/12-5/15)

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To sum up, we know that the USDT asset reserve has been improving, and the proportion of T-Bill is the highest (by 2022Q2, it is likely to exceed 60%), and in the past month or so, USDT has also proved that a large number of short-term redemptions Ability. Based on the performance of the redemption wave from 5/12 to 5/15 alone, it can be said that the liquidity of USDT is even better than that of some bank-like units.

So coming to the second question, assuming the market is super panicked and there is a huge redemption tide (for example, redemption of more than 80% of the issuance within a week), will USDT decouple? The answer is a high probability. Rapid redemption means that a large amount of assets needs to be sold in the short term, and a slight slippage will cause decoupling problems. In fact, all stablecoins can’t pass this level. If such a super black swan really happens, it’s useless for you to switch to USDC.

So a better way to ask the second question is, how likely is a super redemption wave? Is it possible for $USDT to be suddenly overwhelmed by huge redemptions like the money market funds in 2008?

First of all, the securities of the money market fund are an investment tool. They have no other use except for yielding profits. When there is a crack in confidence, all investors will want to escape.
But USDT is different. As an old stable currency, its role has long exceeded that. In addition to the stablecoin itself, all USDT trading pair market makers must hold USDT to operate (regardless of contract or spot, this volume is at least 10 billion US dollars)

Many OTC withdrawal channels and even black market transactions must rely on USDT.
To put it simply, compared to money market funds that may “fall down the tree and the monkeys are scattered” due to the collapse of confidence, a large part of USDT people will not escape (or can’t escape) at all. I roughly estimate that at least It accounts for about 20% of USDT issuance.

In addition, the redemption of USDT cannot be applied for by anyone. Only institutions verified by the whitelist can directly trade with Tether and exchange USDT for USD.
This also leads to the fact that when extreme market conditions appear, USDT is unlikely to be wiped out in a short period of time, and the price of selling iron will slip to the horizon.

85% of USDT’s reserves are cash & cash equivalent, which can be regarded as the part that “can be quickly sold for cash in a short period of time”, and more than half of the 85% is T-Bill with high liquidity

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We assume that the market makers of the USDT pair and some people who have to hold USDT together account for 20% of the total circulation (in fact, it should be higher). If 80% of the current circulation wants to escape, the escape process will be:
1. USDT decouples due to selling pressure
2. Arbitrageurs intervene to buy USDT and exchange USD with Tether

Only the arbitrage buying of 2 is not enough to resist the selling of 1, it may lead to panic spread and cause a larger-scale decoupling
. Since Tether’s redeem process has been very smooth, it has not been closed since its release, and this decoupling is usually very In a short period of time, even the extreme panic moment of the UST collapse on 5/12 only allowed USDT to break off the anchor by 0.95 for a short time, and then rebounded quickly.

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This is not only the arbitrage institutions that can directly trade with Tether, but other speculative buying in the market who are not afraid of death will also intervene, just like UST has a lot of people who do not arbitrage at all just want to bet that he will return $1, these buys The disk made UST dragged for a week before it really exploded and fell below 0.5.
The involvement of this speculative buying will only be stronger in USDT, and the currency circle has experienced too many USDT Fud since 2017

To sum up, will USDT explode?
I think the probability is very low. Those hedge funds have a high probability of losing the short interest, but if they are randomly fud out of a small hole (let’s say ~0.95), they will still make money by closing their positions in time.
So they’re desperately in Fud, get it?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/analyze-the-possibility-of-usdt-explosion/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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