According to JPMorgan analysts, the bitcoin market could face a severe liquidity shock if traders lost faith in the tether (USDT) – a stable currency widely used to finance cryptocurrency purchases.
“If a problem arises that could affect the willingness or ability of domestic and foreign investors to use the USDT, the most likely outcome would be a severe liquidity shock to the broader cryptocurrency market, which could be amplified by its disproportionate impact on HFT [high-frequency trading]”market makers” who dominate the flow, “JPMorgan analysts mentioned in an 86-page report published on Thursday.
The value of Tether is linked to the United States dollar on a 1: 1 basis, and stablecoin is supported by reserves, including “traditional currency and cash equivalents and, from time to time, may include other assets and accounts receivable from loans made by issuing the Tether company to third parties, which may include affiliated entities ”, informs the company’s official website.
USDT’s market capitalization has increased from $ 4 billion to over $ 33 billion in the past 12 months – a sign of its increasing use as a financing currency. According to data collected by asset manager NYDIG and cited by JPMorgan analysts, about 50% -60% of bitcoin traded by USDT since 2019.
Consequently, a sudden loss of confidence in the tether may end up triggering the cryptographic version of a bank run, destabilizing the exchanges and causing a sudden drop in the price of bitcoin. A run on the bank occurs when many depositors withdraw their money at the same time, due to concerns about the bank’s solvency.
Tether, the company behind the tether stablecoin, has long been criticized for its lack of transparency about reserves and its way of issuing new currencies. So far, however, the crypto market has not paid much attention to these concerns.
Part of this lack of attention may stem from the fact that, during the price hike seen in the past 12 months, trades based on US dollars were, on average, larger than trades based on USDT, according Kaiko Research. As such, the risk of a large price drop in the potential loss of confidence in the tether appears low.
JPMorgan analysts said, however, that they believe bitcoin is here to stay as an alternative cryptocurrency.
“Bitcoin’s competition with gold as an” alternative currency “is likely to continue as the millennium generation becomes a more important component of the investor universe and given its preference for ‘digital gold’ over traditional gold,” they said. analysts, adding that its long-term target of $ 146,000 depends on its high price volatility converging with gold volatility, which is a multi-year process.