If you’ve done any reading about stable coins, then you probably know that Tether (USDT) has a checkered history. For their manipulative practices, Tether settled an agreement to pay an $18.5 million fine and was banned from the state of New York. Bloomberg ran an extensively researched piece which concluded that it was not possible to satisfactorily verify how Tether acquired it’s billions in reserves and where it stored them.
The AOTB team, in collaboration with 1.2 Capital Research, recently sent out a report of all the stablecoin ratings to subscribers to help them make intelligent (and safe decisions). That’s included in the $15 / month rate, incidentally.
In that report, Tether did not make it into the top tier of safest stablecoins because of its lingering transparency issues. The main concern is that too much of its collateral might be backed by bad debt.
It is precisely because of the lingering transparency issues that Tether has recently agreed to a full audit by an independent firm. The team will update the report at that point again, but for right now, you might reasonably be worried.
Rather infamously, a hedge fund is shorting Tether. A long time supporter of AOTB asked me on discord how it might be possible to short Tether as the hedge fund was doing. Here’s why. When you short something, you typically have a borrowing rate around 8.5%. If the value of the item goes up, then you lose money (and have to pay the borrowing rate). If it goes down, then you can be handsomely rewarded.
For Tether, it’s a stable coin. The concern, then, isn’t that Tether will go up too much (if for some reason it de-pegged to the upside, it would soon collapse down because that would me the coin was “broken”). At most, then, you’re going to lose your borrowing cost of 8.5% annually.
If, on the other hand, Tether collapses, then you’ll make tons of money as it goes to $.000000001 (or whatever). The reward to risk profile is thus massively in your favor as long as you think that Tether has at least a 25% chance of collapsing (roughly).
If you need a refresher on how to think about risk to reward profiles, read this short piece.
Suppose, for a moment, that you’d like to take that chance. We’re talking about a possible 10% or less loss on the trade after all. How would you do it?
Well, unless you have institutional connections, you are not going to be able to short Tether directly. So, is there a next best option?
Presumably, you could try to set yourself up for arbitrage trades as the coin falls. Oapital Funds (another crypto hedge fund) did this while UST collapsed. Again, it’s rather involved and will be helped by having the right sorts of institutional connections.
The best option for a retail trader, to my mind, is to use Domination Finance. They allow you to trade the % of total market share a coin has. For example, on TradingView, you can find the following dominance chart.
You’ll see that BTC has better than 43% of all crypto value. That constitutes its percent dominance of the market. You’ll also see that Tether has 7.91% dominance, while USDC has 6.62%.
What Domination Finance allows you to do is bet whether that percent of dominance will go up or down. I developed an entire trading strategy for bear markets that’s done better than 43% YTD. That’s proprietary for the 1.2 Capital hedge fund.
But, I’ll share this strategy with you and subscribers will get updates on the trades involved. Let’s start out with an overview.
A while back, I was contacted by Domination Finance to do a write up on their project–however I saw fit. I sat down and chatted with the c-suite and they walked me through all the technical aspects.
I immediately developed my bear market algo from that, but I’ve been playing around with it for a variety of trades since.
To start trading, you need to pick your blockchain and connect your wallet.
I prefer using Polygon to Ethereum for the obvious reason that the fees are lower. They also allow you to use the Boba network. That’s a new L2 built on Ethereum which has some nice incentives.
In fact, if you want to just provide liquidity and earn money on every transaction, just jump to the bottom of the page, and hit the golden button.
If you did that on the Boba L2, you’ll get Domination Finance coins. This allows you to earn them, so that the Domination Finance team is in no danger of issuing unregistered securities (their legal team really impressed me). That’s a trade that will pay off if the platform really takes off–so in the next bull market cycle.
For now, however, we’re more interested in those long and short buttons. Because the platform is new, you have only three coins to trade. More will be added soon (I hope they add USDC soon for reasons I’ll explain).
I’ve selected Tether, obviously, but you can bet on BTC’s and ETH’s dominance too.
Once you select your coin, simply hit the red or green button and decide how much you’re going to bet. You’ll need USDC for this–so load that onto your wallet before.
What you’re doing is buying either a long dominance or a short dominance coin. The long coin makes money when the dominance increases while the short dominance does the reverse. You aren’t actually shorting anything, which is why this carries comparatively fewer risks. You have no borrowing costs in this scenario.
Now for the weird part: If you don’t want to hold your position to the expiration date (often 6 months) you need to neutralize your position by buying an equal amount of the other side of that trade.
So, for example, if you were shorting Tether for $1000 and its dominance dropped, you could either wait for the expiration date (hoping the drop was permanent) or you could close out your position by buying $1000 of long Tether dominance.
I mention this because it means you’ll need to have an equal amount of capital to close out your trade. Prepare for that.
The Other Reason To Short Tether
Because this method of shorting doesn’t require you to borrow money, and because it doesn’t expose you to involuntary liquidation, it’s safer than your typical short sale.
Now, maybe you don’t think that Tether will collapse. Well, there’s still a good reason to short Tether dominance (if not Tether itself). Just have a look at this year long chart.
When I first wrote my algo for trading dominance, I was aware that the theoretical maximum level of dominance was at 6%. Then UST imploded and they changed the structure of the coins in response.
I got in at the low 4% range and within a week, I was over 6.25% Tether dominance. The trade was obvious to me: UST is collapsing, so I bet that Tether will increase its share of dominance. And it did.
Now, I think something else is happening. I think that USDC is rising in its dominance and may flip Tether, given all the bad press surrounding it. Why would you want to mess with Tether and take on that additional risk when you could just use USDC, which has no such risk?
Even if the crypto winter continues, I think that Tether will lose market share to USDC. That’s partly why I’d like to bet on USDC dominance. But, lacking that option, I might as well bet on Tether’s falling market share.
There is some other technical stuff you’ll want to note. Above all, make sure that you check the expiration date of the tokens. If it’s too soon, your position might be closed at a loss even if Tether does ultimately decline in market share.
But as long as you have a nice time-line, then Tether is likely to lose in market cap to competing (and less troubled) stable coins. It doesn’t have to go to zero or depeg for you to make money on this bet. People just have to prefer other stablecoins.
So, consider this a mini-guide in trading dominance. All the high level stuff is in this and you know both how and why you can use dominance trading to “short” Tether.
For the details, do read to make sure of expiration dates and whatnot. Subscribers can always ask me questions on Discord if they have them.
This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.
That’s it for this week. Remember to join us on Discord if you haven’t already.
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