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According to analysts at JPMorgan, the bitcoin market could face a severe liquidity shock if traders lose faith in the tether (USDT) – a stable coin widely used to fund cryptocurrency purchases.
“If any issues arise that could affect the willingness or ability of domestic and foreign investors to use USDT, the most likely outcome would be a severe liquidity shock in the larger cryptocurrency market, which could be magnified by its disproportionate impact on HFT. [high-frequency trading]the style market makers who dominate the stream, ”JPMorgan analysts said in an 86-page report released Thursday.
The value of Tether is pegged to the US dollar on a 1: 1 basis, and the stable currency is backed by reserves, including “traditional currency and cash equivalents and, from time to time, may include other assets. and receivables from loans made through the Tether issue. company to third parties, which may include affiliated entities, ”according to the company’s official website.
The market capitalization of USDT has grown from $ 4 billion to over $ 33 billion in the past 12 months – a sign of its growing use as a funding currency. According to data collected by asset manager NYDIG and cited by analysts at JPMorgan, around 50% to 60% of bitcoins traded for USDT since 2019.
Therefore, a sudden loss of confidence in the bond could end up triggering the crypto version of a bank run, destabilizing trading, and causing bitcoin price panic to drop. A bank rush occurs when many depositors withdraw their money at the same time for the sake of the bank’s creditworthiness.
Tether, the company behind tether stablecoin, has long been criticized for its lack of transparency about reserves and the way it issues new coins. So far, however, the crypto market hasn’t paid much attention to these concerns.
Part of this lack of attention may stem from the fact that during the price rally observed over the past 12 months, transactions based on the US dollar were, on average, larger than transactions based on the USDT, according to Kaiko research. As such, the risk of a big price crash on the potential loss of confidence in the tie seems low.
Analysts at JPMorgan, however, said they believe bitcoin is here to stay as an alternative cryptocurrency.
“Bitcoin’s competition with gold as an ‘alternative currency’ will likely continue as millennials become a larger component of the investor universe and given their preference for ‘digital gold’ by compared to traditional gold, ”analysts said, adding that its long-term goal of $ 146,000 depends on the high volatility of its prices converging with the volatility of gold, which is a multi-year process.
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