Speculators short-selling arbitrage Stablecoins are no longer stable
Stablecoins claim to have a 1:1 relationship with the US dollar, creating an image of stability. However, speculators take advantage of the lack of high-quality liquid asset backing to provide liquidity, which increases the volatility of stablecoins. If large-scale short-selling activities similar to last year's in the cryptocurrency market occur again, they could follow in the footsteps of TerraUSD (UST) and Luna, leading to a collapse.Compiled by: Techub News-Sean
The four senior executives of the stablecoin Tether have each seen their net worth exceed $1 billion, as reported earlier by Forbes, due to the coin's value reaching an all-time high. The stablecoin claims a 1:1 relationship with the US dollar, presenting an image of stability, but speculators have increased volatility due to a lack of high-quality liquid asset backing. If a large-scale short-selling activity similar to last year's occurs again, it could follow the fate of TerraUSD (UST) and Luna. 
The cryptocurrency market has entered a prolonged bear market; however, Forbes reports that Tether, headquartered in the British Virgin Islands, recorded a profit of $1.5 billion in the first quarter of this year alone. The company's CFO, Giancarlo Devasini, owns over 40% of Tether, with his net worth skyrocketing to at least $4 billion, all thanks to the rapid increase in Tether's market value.
Tether's Long-Term Deviation from 1:1 with the US Dollar
Although Tether's business is relatively stable, it was affected last year by the sudden decoupling of its peer UST from the US dollar, causing it to fall below its peg on two occasions, raising concerns among investors about whether Tether had sufficient liquid assets to handle a crisis.
In August of this year, Tether again experienced a deviation from its pegged price. In fact, since August 3, Tether has shown a slight decoupling; another stablecoin, USD Coin (USDC), has seen its price rise continuously, reaching as high as $1.0013, reflecting that speculators are influencing Tether's trading price through USDC. Paolo Ardoino mentioned that some individuals might be attempting to force market makers to act through volatility.
This volatile market situation highlights that even though Tether has become one of the largest stablecoins globally, it can still experience fluctuations due to market-making activities. Another major stablecoin, USD Coin, is similarly being used for market-making.
In fact, there have been precedents for stablecoin collapses; UST, the largest algorithmic stablecoin globally, was designed for cryptocurrency investors seeking more stable price movements. To maintain a stable value at 1:1 with the US dollar, Terra's founder Do Kwon established The Luna Foundation Guard (LFG) to primarily support the Terra ecosystem.
Precedents for Stablecoin Collapses
UST's value had been stable since its launch in 2020, maintaining a 1:1 peg with the US dollar until early May of this year. However, on May 9 last year, UST suddenly plummeted, decoupling from the dollar, and lost over 90% of its value within two days.
Many commentators believe that the algorithmic structure of UST's stablecoin and its rapid development without actual reserve backing were the main reasons for this collapse. UST had seen a strong upward trend early last year because its subsidiary LFG promised to use $10 billion in Bitcoin to support UST's peg to the dollar.
The ultimate collapse of UST underscored the importance of having substantial asset backing. Unlike other stablecoins, UST is purely an algorithmic stablecoin without reserve backing, using algorithms to calculate a balance between UST and its sister coin Luna, maintaining its value at 1:1 with the dollar.
At that time, someone tweeted that speculators, seeing UST's need to maintain a 1:1 relationship with the dollar, withdrew $350 million worth of UST from cryptocurrency wallets to decouple it from the dollar, forcing LFG to sell Bitcoin to maintain the peg.
The individual who made this statement speculated that the short-sellers held significant short positions in Bitcoin, with the ultimate goal of causing a sharp decline in Bitcoin prices to profit. The commentator estimated that the short-sellers profited over $800 million, resulting not only in a significant drop in Bitcoin but also in UST severely deviating from its pegged price.
Therefore, whether it is last year's collapse of UST or Tether's recent slight deviation from its pegged price with the US dollar, it is enough to convince investors that the design of stablecoins has inherent instability, especially those stablecoins without high-quality liquid asset backing, which are fraught with risk.
