An excerpt from a report by JPMorgan & Chase warns its customers of a possible “liquidity shock” on the Bitcoin market.
The excerpt commends the cryptocurrency industry for improving its screen liquidity relatively better than traditional asset classes. At the same time, it warns that most of these liquidity reserves come from high frequency traders who flee the markets when volatility increases.
JPMorgan attributed the discussion to the global market trend in March 2020, when liquidity in LIBOR, repurchase agreements, short-term commercial paper and other large-volume money markets contracted dramatically. The purchasing power of the US dollar rose, leaving even the safest of all US Treasuries in critical condition.
Bitcoin was one of the victims of this illiquid age.
It wasn’t until the Federal Reserve decided to join its quantitative easing program that the world market recovered while pushing the flagship cryptocurrency higher. The US Federal Reserve’s decision to cut interest rates to near zero and buy sovereign and corporate debt indefinitely resulted in a long bull cycle between stock, bond, gold and even bitcoin markets.
Bitcoin reached its record high near $42,000 in January 2021. Source: BTCUSD on TradingView.com
The cryptocurrency has rallied more than 700 percent from its nadir in mid-March of $ 3,858. Still, the potential to reduce those gains is higher as long as the world market expects a March-like liquidity crisis. According to JPMorgan analysts, Bitcoin’s biggest liquidity risks come from the cryptocurrency industry.
“Most of Bitcoin trading is not against Fiat USD, but against USDT, a stable coin issued by Tether Ltd and pegged 1: 1 to the US dollar,” they explained, adding that the in Hong Kong-based corporations avoid falling under the same strict disclosure regime as traditional banks.
“Tether Ltd is claiming reserve assets in the form of cash and equivalents equal to its outstanding liabilities, but has not known to have conducted an independent review and alleged in court filings that it is not required to provide full records,” the JPMorgan note said.
Risks for Bitcoin Bulls
According to data from CoinMarketCap, Tether has $ 25.52 billion in circulating supply, an increase of more than 500 percent from its January 1, 2020 market cap of $ 4.096 billion. Parent company iFinex, which also owns popular BitFinex trading platform, is accused of losing $ 850 million in customer funds to a Panama-based company.
Tether's market capitalization crosses the $25 billion mark. Source: CoinMarketCap.com
The New York Attorney General’s filing against iFinex states that in 2018 BitFinex had “extreme difficulty complying with requests from its customers to withdraw their money from the trading platform.” In October 2018, the USDT stablecoin had lost its 1: 1 peg to the US dollar and dropped to just $ 0.86. Two months later, Bitcoin hit its yearly low at $ 3,200.
Even so, Tether still controls 80 percent of all Bitcoin trading volumes on a daily basis.
“A sudden loss of confidence in USDT would likely cause a severe liquidity shock to the Bitcoin markets,” JPMorgan said, adding that “access to by far the largest pools of demand and liquidity could be lost.”