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FTX Benson Detailed Explanation: Will USDT Thunder?

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Hedge funds with hundreds of millions of dollars are shorting USDT in large quantities, try to analyze the possibility of USDT thunder

Original author: FTX_Benson

Let's take a look firstUSDT asset reserves, in fact, all Stablecoin issuer asset reserves are similar to money market fund components, which are based on cash, high-quality short-term bonds and bills host.

Time goes back to 2008, when the largest money market fund Reserve Primary has a size of US$63 billion, and it holds about US$78 million of Lehman Bank's short-term bonds (only 1.2% of total assets).

It was this negligible exposure that caused panic in the market. Because the news of Lehman Brothers' bankruptcy was too sudden, Reserve Primary had no time to deal with Lehman's short-term bonds. No one wanted to buy or sell these bonds, so it was impossible to assess their residual value. As a result, they have no way to assure investors that their 100 cents are equivalent to 1 dollar.

On September 16, 2008, Reserve Primary announced that it had only 97 cents left. It broke the public's perception that the value of money funds is always $1. Subsequently, investors’ redemption spree caused Reeserve Primary’s assets to shrink by 60% in 2 days, forcing the fund to announce a one-week suspension of redemptions.

The fall of Reserve Primary led to the worst investor panic in modern financial history. Market funds pulled as much as $123 billion.

For USDT will be thundered or not, two questions must be answered first:

1. The quality of USDT asset reserves How is the liquidity?

2. Is it possible for USDT to experience a huge wave of redemption like the money market funds in 2008?

First answer the first question, USDT The quality of asset reserves has been improving all the time. Originally, half of them were CP (commercial paper), and this part was gradually replaced by T-Bill (US short-term treasury bonds).

The ratio of CP vs T-Bill:

· 2Q21: 49%, 24%

· 3Q21: 44%, 28%

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· 4Q21: 31%, 44%

2022Q2 report has not come out yet, but according to Tether CTO @paoloardoino's Lecture , Tether has reduced its CP by about half after 2022/3/31, and currently only holds 8.4 billion US dollars in CP, which means that the proportion of CP has dropped to about 13%. Their long-term goal is to increase the exposure of CP down to zero.

Because the USDT circulation has not changed much before 2022/5, it is reasonable to guess that the original CP position was transferred to other assets (high probability is T- Bill).

Aside from T-Bill, the quality of CP held by USDT is also very good, with CP rated above A-3 The proportion has been increasing. In the audit report, it was revealed that 99.5% of USDT's CP ratings are above the A-3 level.

There is a proverb in English : action speaks louder than words (action speaks louder than words).

The best way to express liquidity is the stress test of a large number of redemptions. In the past month or so, USDT has redeemed 17 billion US dollars, and the circulation has decreased by 20% (83 billion --> 66 billion), of which 10 billion redemption occurred when UST collapsed and the overall market was most panicked (5/12-5/15).

To sum up, we can know:

·The quality of USDT reserve assets has been improving.The previously criticized CP ratio has been reduced to about 13%.

· The proportion of T-Bill continues to rise and is currently close to 50%. The audit report for the new quarter is likely to exceed 60%.

· USDT only holds investment grade CP, 99.5% of CPs are rated above A-3.

· USDT has proven the ability to redeem a large number of redemptions in a short period of time, just from the performance of the 5/12-5/15 redemption tide,< b>The liquidity of USDT is even better than some banking units.

Then come to the second question, assuming that the market is super panicked and there is a huge wave of redemption (for example, redemption within a week More than 80% of circulation), will USDT be decoupled?

The answer is a high probability. Quick redemption means that a large number of assets need to be sold in the short term, and a slight price slippage will cause decoupling. In fact, all Stablecoins cannot pass this level. If such a super black swan really happens, it will be useless for you to switch to USDC.

So a better way to ask the second question is,how likely is the super redemption wave to happen? Is it possible that USDT will suddenly be overwhelmed by sky-high redemption like money market funds in 2008?

First of all, the securities of the money market fund are investment tools, which have no other purpose except for yielding interest. When there is a crack in confidence, all investors will want to escape.

But USDT is different, As a veteran Stablecoin, USDT has far surpassed Stablecoin itself, and all USDT trading pairs make the market All merchants must hold USDT to operate (regardless of contract or spot, this amount 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 collapse due to confidence collapse, a large part of USDT will not escape at all ( Or can't escape), I roughly estimate that this ratio accounts for at least about 20% of the USDT circulation.

In addition, not everyone can apply for the redemption of USDT. Only institutions that have passed the whitelist verification can directly trade with Tether and exchange USDT for US dollars . So when the extreme market appears, it is unlikely that USDT will be wiped out in the short term, and the price will slide to the sky.

85% of USDT reserves are cash & "Cash", and more than half of the 85% are T-Bill with high liquidity.

We assume that the USDT pair market maker, with some People who do not hold USDT account for 20% of the total circulation (in fact, it should be higher). These people can't escape, and they can only feel numb in the face of Fud.

Assuming that the remaining 80% of the circulation wants to escape, the escape process will be:

1. USDT decoupled due to selling pressure.

2. Arbitrageurs step in to buy USDT and exchange Tether for USD.

Only if the arbitrage buying of 2 is not enough to resist the selling of 1, it may lead to the spread of panic and cause a larger decoupling.

Because Tether's redeem process has been smooth and has not been closed since its release, this decoupling is usually very short, even on 5/12 At the moment of extreme panic when UST collapsed, USDT only temporarily de-anchored at 0.95, and then rebounded soon.

There are not only arbitrage institutions that can directly trade with Tether Will buy, and other speculative buying in the market that is not afraid of death will also intervene, just like UST has a lot of people who don’t know how to arbitrage at all, just want to bet that he will get back $1, these buying made UST dragged on for a week before it really exploded dropped below 0.5. This kind of speculative buying will only be stronger in USDT, and the industry has experienced too many USDT Fuds since 2017.

To sum up, will USDT be thunderstorm? I think the probability is very low. Those hedge funds have a high probability of losing the short interest, but if they get a small pit by fud (let's say ~0.95), they will still make money if they close their positions in time. So they're trying their best at Fud, get it?