Short selling involves selling an asset one does not own, buying it back at a lower price later, and pocketing the difference. This mechanism is asymmetric, exposing the seller to theoretically unlimited losses, since unlike a buyer who can only lose their initial stake, an asset’s price has no ceiling on the upside. In March 2022, Fir Tree Capital Management, a fund managing approximately 4 billion dollars, built a large short position against Tether’s USDT, convinced that its reserves contained questionable assets. After the collapse of the UST stablecoin in May, other funds joined the movement, betting hundreds of millions of dollars against USDT. Result: USDT briefly dipped below its peg, Tether honored several billion dollars in redemptions within days, and the stablecoin remains operational four years later, bigger than ever, leaving the funds that held their positions with substantial losses.
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