According to analysts at JPMorgan, the Bitcoin market could experience a severe liquidity shock if traders lose confidence in Tether (USDT) – a stablecoin often used to fund cryptocurrency purchases.
“If issues arise that could affect the willingness or ability of both domestic and foreign investors to use USDT, the most likely outcome would be a severe liquidity shock to the broader cryptocurrency market, which could be exacerbated by its disproportionate impact on HFT [high-frequency trading]Style market makers who dominate the flow, ”said JPMorgan analysts in an 86-page report released on Thursday.
The value of Tether is pegged 1: 1 to the US dollar and the stablecoin is backed by reserves, including “traditional currency and cash equivalents and may from time to time contain other assets and claims arising from loans of the Tether issuer”. Company to third parties, which may also include affiliated companies, ”says the company’s official website.
USDT’s market cap has grown from $ 4 billion to over $ 33 billion in the past 12 months – a sign of its increasing use as a funding currency. According to data collected by asset manager NYDIG and quoted by JPMorgan analysts, around 50-60% of bitcoins have been trading for USDT since 2019.
Hence, a sudden loss of confidence in Tether could trigger the crypto version of a bank run, destabilizing the exchange, and causing a panic drop in Bitcoin price. A bank run 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 a lack of transparency about reserves and its way of issuing new coins. So far, however, the crypto market hasn’t paid much attention to such concerns.
Part of this inattention could be due to the fact that during the price rally over the past 12 months, US dollar-based trades averaged larger than USDT-based trades, according to Kaiko Research. Therefore, the risk of a major price crash due to a possible loss of confidence in Tether appears low.
However, JPMorgan analysts said they believe Bitcoin will remain as an alternative cryptocurrency.
“Bitcoin’s competition with gold as an ‘alternative currency’ is likely to continue as millennials become a more prominent part of the investor universe, preferring ‘digital gold’ to traditional gold,” analysts said, adding that the long-term target of $ 146,000 depends on the high price volatility converging with the volatility of gold, which is a multi-year process.