The Crypto Version of a Credit Default Swap: A Put Option for Tether

Tether, popularly known as the biggest stablecoin with a US-dollar backing, made its way into every part of the crypto market. Now, it’s making news again, but for unfavorable reasons. It comes from crypto investors who adopt a permanently bearish position. They’re worry that concerns about tether falling will lead to the net asset value of its fund going below $1.

Now, they’re looking for a crypto market version of the credit default swap. It’s a derivative instrument that lets a buyer offset or ‘swap’ his credit with that of another. A solution could be a Tether put option. This means betting that tether’s price will go below $1, which is its ostensible redemption value. According to experts in digital currency markets, a few traders are actively looking to make such a trade.

Co-founder and president of GSR Markets, Rich Rosenblum, stated that the firm gets many inquiries from investors about Tether puts. Initially, the question of whether traders could bet against Tether was once only an academic one. Now, it’s now getting more traction. A Monday report highlights a tether probe. It explains that US Department of Justice will investigate the issuer of the stablecoin on the charges of bank fraud.

Tether played a vital role in establishing the $1.6 trillion cryptocurrency market. Currently, it has aligned its PEG ratio to the US Dollar. Tether responded to the report by describing it as the ‘repackaging’ of old claims as news.

With the put option, the purchaser will get the right, but not an obligation, to sell off the token. But, they must do it by a pre-set price on a specific date or before it. Buyers who use the put option are implicitly bearish. Consequently, they pay a premium to the seller, who offers insurance for potential price drops.

Traders seeking tether puts are in need of a hedge against the stablecoin losing its 1:1 PEG to the USD. Because it had the dollar peg, buyers could avoid volatility risks, which are common among Bitcoin. That’s what makes Tether a stablecoin.

Over the last year, it was used widely as a means to pay for crypto purchases. This is proven by the fact that its market capitalization rose sixfold, reaching highs of over $60 billion.

Nevertheless, Tether is controversial because of the constant lack of transparency surrounding its reserves. Also due to the increasing unease of regulatory authorities when it comes to stablecoins. Experts state that ever since Tether came about, market participants have questioned whether the stablecoin is reliable or not. There are concerns that tether lacks backing from liquid reserves and mass redemptions will cause the dollar peg to break.