According to JPMorgan analysts, Bitcoin’s risk could be a “sudden loss of confidence” in Tether

According to JPMorgan analysts, a serious risk for Bitcoin could be a “sudden loss of confidence” in Tether (USDT) stablecoin.

In a comprehensive 86-page report released Thursday, JPMorgan analysts, led by chairman of global research Joyce Chang, said USDT could have an impact on Bitcoin price if it goes bad.

“A sudden loss of confidence in USDT would likely trigger a severe liquidity shock to Bitcoin markets that could lose access to by far the largest pools of demand and liquidity,” the analysts said.

Most of Bitcoin trading is via USDT, as The Block reported earlier this month, when the stablecoin’s market cap exceeded $ 30 billion. Citing data from asset manager NYDIG, JPMorgan analysts said that around 50-60% of Bitcoin trading has been via USDT as of 2019.

USDT is issued by Tether and is pegged 1: 1 to the US dollar. However, since Tether is not subject to the same strict regulatory and disclosure regime as traditional commercial banks and “certainly has no deposit insurance”, USDT represents an end risk for Bitcoin, according to analysts.

The end risk is the possibility that an unlikely event will occur and cause a significant loss to an asset. It is a form of portfolio risk that arises when an investment moves more than three standard deviations from the mean above the risk of normal distribution.

JPMorgan analysts said Tether is claiming reserves of cash and equivalents equal to its outstanding debt “but has not known to conduct an independent review and alleged in court records that it does not need full coverage”.

“So should 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 to the broader cryptocurrency market, compounded by its disproportionate impact on HFT [high-frequency trading]Style market makers who dominate the flow, “said the analysts.

Overall, JPMorgan’s global research team believes that Bitcoin is an “economic sideshow” but should be preserved as an “alternative” currency.

However, analysts are unsure whether crypto assets offer diversification advantages over assets like stocks.

“Crypto assets remain the worst hedge against major drawdowns in stocks with questionable diversification advantages at prices well above production costs, while correlations with cyclical assets increase with the mainstreaming of crypto owners,” the analysts said.

You can read the full report here.

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