How to short USDT stablecoin? A Comprehensive Guide
How to short USDT summary
Tether (USDT) is among the most popular stablecoins, pegged 1:1 with the US dollar. Given its significant role in the crypto market, traders often look for opportunities to profit, and short-selling USDT is one of them. Short selling, in essence, is a strategy where traders bet on the decline of an assets price. This guide will delve into how one can short-sell USDT, the risks involved, and strategies to consider.
What is USDT?
Tether (USDT) is the largest stablecoin by market capitalization.
What is a stablecoin?
Stablecoins are kinds of cryptocurrency whose value is pegged to a fiat currency like the U.S. dollar, other cryptocurrencies, or a commodity like oil or gold.
What is Short Selling?
Short selling is essentially selling an asset that you do not own. You borrow the asset from a broker, sell it, and plan to buy it back later at a lower price to return to the lender. The difference between your selling price and your repurchase price is your profit. In the case of USDT, the principle remains the same.
Why Short Sell USDT?
Stablecoins, by design, should be pegged to their underlying asset, but sometimes they deviate. Arbitrage opportunities arise when USDT trades above or below $1. Skepticism about Tethers reserves or regulatory news can impact its peg. By short-selling, traders can capitalize on these price discrepancies.
What is backing the USDT peg?
Tether claims that USDT is backed by a reserve of cash and other assets, such as Treasury bills and commercial paper. However, the exact composition of the reserve has been criticized for being opaque and lacking transparency.
Tether has published a number of attestations from third-party auditors, but these attestations have not been full audits. In 2022, Tether published an attestation from the auditing firm BDO Italia, which stated that Tethers reserves were sufficient to back all outstanding USDT tokens. However, the attestation did not provide a detailed breakdown of the reserves composition.
Some critics have alleged that Tethers reserve is not fully backed by cash and other assets. They argue that Tether has inflated its reserve by including assets that are not liquid or that have little value. Others have alleged that Tether has used its reserve to manipulate the price of Bitcoin and other cryptocurrencies.
Tether has denied these allegations, but it has been criticized for its lack of transparency. In 2021, the New York Attorney Generals Office reached a settlement with Tether in which Tether agreed to pay $18.5 million in fines and to disclose more information about its reserves.
Overall, the backing of the USDT peg is a matter of some uncertainty. Tether claims that the peg is fully backed by cash and other assets, but the company has been criticized for its lack of transparency.
3 Ways to short USDT
- Borrow USDT and sell it on the market. Here, you can choose what currency
- Go long in USDC/USDT perpetual contract on Bybit. Here, you speculate that USDT will lose value against USDC. If both depegs at the same time and at the same rate, you will not make profit.
- Go long any cryptocurrency in the ANY*/USDT perpetual market.
1. How to borrow USDT and sell it?
Borrowing USDT against crypto collateral to then sell USDT, especially with the intention of speculating on a depegging event, is a strategy that comes with significant risks. However, if you believe there is an impending risk to USDTs peg and want to capitalize on potential price discrepancies, heres a step-by-step guide:
1. Choose a Crypto Lending Platform: Platforms like Compound, Aave, Nexo, and YouHodler allow users to deposit cryptocurrency and borrow against it.
2. Create an Account: Sign up and complete any necessary KYC procedures. This ensures that you meet the platforms standards for borrowing.
3. Deposit Your Cryptocurrency: Transfer your crypto (e.g., BTC, ETH) to the platform. This will serve as your collateral for the USDT loan.
4. Borrow USDT: Once your collateral is confirmed, you can borrow up to a certain percentage of its value in USDT. This percentage is called the loan-to-value (LTV) ratio, and it varies by platform.
5. Transfer Borrowed USDT to an Exchange: Send the borrowed USDT to a cryptocurrency exchange where you can sell it. Ensure the exchange has a robust USDT market with sufficient liquidity.
6. Sell USDT: If you believe USDT might lose its peg (i.e., drop below $1), you will sell it, expecting to buy it back at a lower price later.
7. Monitor the Market: Watch USDTs price and news. If USDT does depeg, its price might fall rapidly.
8. Buy USDT Back: If USDTs price drops, as you speculated, you can buy it back at a lower rate, profiting from the difference between your selling and buying prices.
9. Repay the Loan: Transfer the repurchased USDT back to the lending platform to repay your loan. Depending on the loans duration and terms, you may also owe interest.
10. Withdraw Your Collateral: Once the loan is repaid, you can withdraw your original crypto collateral.
Risks and Considerations:
Liquidation: If the value of your crypto collateral drops significantly, the platform might automatically sell a portion of it to cover the loan (a liquidation event). Always be aware of the LTV and maintain a safe margin.
USDT Stability: Theres a chance that USDT will maintain its peg or return to it quickly. If you sell USDT and its value doesnt drop (or even rise), you might buy back at a higher rate, resulting in a loss.
Platform Risks: Platforms can be hacked or face liquidity issues. Ensure you choose a reputable platform and be aware of the risks involved in any online transaction.
Regulatory Risks: The regulatory landscape for crypto is constantly evolving. Engaging in speculative activities might attract regulatory scrutiny, so always be informed about local regulations.
Interest Rates: Remember that borrowing usually isnt free. You might need to pay interest on the borrowed USDT, which can eat into potential profits.
In conclusion, while there are opportunities to profit from speculating on a potential depegging event, the risks are significant. Ensure youre fully aware of the implications and only invest what youre prepared to lose.
2. How to go long USDC/USDT perpetual contract on Bybit?
Going long on a USDC/USDT perpetual contract on Bybit means youre speculating that the price of USDC will rise in relation to USDT. This guide will provide a step-by-step overview of how to establish a long position on this trading pair:
1. Create an Account:
- Sign up on Bybits official website if you havent done so.
- Complete the necessary KYC (Know Your Customer) verifications if required.
2. Fund Your Account:
- Deposit the necessary collateral into your Bybit wallet. Bybit supports multiple cryptocurrencies as collateral, such as BTC, ETH, EOS, and XRP. Always ensure you send the funds to the correct wallet address.
3. Navigate to the Perpetual Contract Market:
- Go to the trading section on Bybit.
- Select the USDC/USDT trading pair among the available markets.
4. Select Your Order Type:
- Decide on using a market order (executes instantly at the prevailing market price) or a limit order (executes when a predetermined price is met).
5. Place Your Order:
- Determine the quantity you want to purchase.
- If opting for a limit order, set the price youre willing to buy at.
- Decide on the amount of leverage you wish to apply (bear in mind that using leverage amplifies both potential profits and potential losses).
6. Review and Execute:
- Double-check your order details for accuracy.
- Click the Buy/Long button to initiate your long position.
7. Monitor Your Position:
- After opening your position, keep track of its performance through Bybits interface.
- Pay attention to crucial details such as the liquidation price, margin, and unrealized profit/loss.
8. Close Your Position:
- To realize a profit or to limit a loss, you may decide to close your long position.
- This can be done by placing a limit order at a specific target price or by executing a market order to close the position immediately.
Considerations and Risks:
Liquidation: Keep an eye on the liquidation price, especially if youre using high leverage. If the market moves against your position and hits the liquidation price, your position will be automatically closed, leading to a loss of your initial margin.
Funding Rate: Perpetual contracts have a feature called the funding rate which can either be positive or negative. When positive, long position holders will pay the funding to short position holders. Conversely, if its negative, long position holders will receive funding. This rate can vary and is periodically settled between traders (e.g., every 8 hours on Bybit).
Market Volatility: Cryptocurrency markets can be highly volatile. Its crucial to be prepared for rapid price swings that can affect your position.
Technical Preparedness: Ensure a consistent internet connection and familiarity with the Bybit platform to avoid unintentional trading mistakes.
In summary, taking a long position on the USDC/USDT perpetual contract on Bybit allows traders to capitalize on potential upward price movements of USDC against USDT. However, understanding the risks and utilizing risk management tools, such as stop-loss orders, are crucial when engaging in such trading activities.
3. Go long any cryptocurrency in the ANY*/USDT perpetual market.
Same as number 2.
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