According to JP Morgan, the crypto market could suffer a major liquidity shock if confidence in Tether (USDT) is lost.
This is stated in a lengthy official report dedicated to Bitcoin, blockchain and digital finance, published last Thursday.
In this report, JPMorgan analysts write:
“If any issues arise that could affect the willingness or ability of both domestic and foreign investors to use USDT, the most likely result would be a severe liquidity shock to the broader cryptocurrency market, which could be amplified by its disproportionate impact on HFT [high-frequency trading]-style market makers which dominate the flow”.
The fact is that most of the trading in the crypto markets takes place in USDT, so much so that Tether dollar is by far the most heavily traded token.
For example, despite being the seventh-largest cryptocurrency by market capitalization, it has traded over $100 billion in the last 24 hours, with bitcoin at $55 billion, ETH at $24 billion, XRP at $10 billion and all the others below.
JP Morgan: Tether’s problems will be reflected in the crypto market
Tether is involved in a court case in New York over an old issue related to $850 million that seemed to have disappeared. This lawsuit has been going on for a few years now and it is not known when it will come to a conclusion, although for now, Tether has not given any problems to investors.
Moreover, there are many who question whether all of the 34 billion USDT issued are actually backed by an equal number of US dollars, or equivalent, although Tether has always claimed that they are 100% backed.
It is therefore logical, according to JP Morgan, to imagine that any problems with Tether could be reflected in the entire crypto market, even though there are actually several alternative stablecoins already available, such as USDC, DAI and BUSD.
The fear is that a loss of confidence in Tether could lead to a kind of ‘bank run’ by USDT holders, with huge and sudden USD exchange requests, and that the company may not be able to meet them all.
It should be stressed, however, that this would appear to be a purely theoretical scenario to date and that there seems to be no evidence that it could actually happen.
It should also be noted that with the significant growth in the prices of the major cryptocurrencies over the past three months, Tether’s market capitalization (i.e. the number of tokens in circulation) has also grown significantly, from 18 billion at the end of November 2020 to 34 billion today. Furthermore, only a year ago the capitalization was just over 4 billion. And so, despite many trying to undermine Tether’s reputation, this stablecoin is not having any problems.
Furthermore, it is worth noting that the analysts at JP Morgan do not explain why this might happen, but merely speculate on the consequences.