Last Year’s Crypto Boom Was Fixed: Researchers

Bitcoin’s plight in 2018 has been a stark reversal from the leading cryptocurrency’s performance in 2017, particularly vs. the end of last year. So what gives? If you were to ask a pair of researchers, one of whom has a penchant for uncovering fraud in the financial markets, the gains have an asterisk next to them, one that leads to popular U.S.-dollar linked cryptocurrency Tether (USDT).  

The University of Texas Finance Professor John Griffin and understudy Amin Shams have published a paper entitled “Is Bitcoin Really Un-Tethered?” It chronicles what the academics ultimately conclude is a shady dynamic between bitcoin and Tether, the No. 12 cryptocurrency by market cap.

Using algorithms and transaction data collected from the public blockchain, the researchers determine that Tether is a coin that is “pushed out into the market” and not driven by supply and demand but instead the whims of the bitcoin price. 

They point to the Bitfinex exchange, which is looking to redomicile from Asia to Switzerland, aka Crypto Valley. After monitoring the activity surrounding Tether coins on Bitfinex, the researchers propose that Tether supply is added to the market by Bitfinex at crucial times in bitcoin’s performance.

Source: “Is Bitcoin Really Untethered?”

What Gives?

That’s what drove the bitcoin price to nearly the $20,000 level in December 2017, according to the report, whose results they say are “consistent with the Tether issuers pushing out Tether to stabilize the price of bitcoin,” the report states. The U.S. CFTC earlier this year issued subpoenas to both Bitfinex and Tether, both of which are led by J.L. van der Velde, to ensure that there were adequate reserves that they claim make the coin stable. No fraud was uncovered.

Tether boasts a market cap of $2.5 billion and it is viewed as a more stable alternative to bitcoin’s erratic price swings, though the details surrounding the mechanics of it all are held close to the vest. From what the researchers say, Tether coins are created in groups of 200 million, after which time the coins are directed to Bitfinex.

Meanwhile, when bitcoin suffers a dramatic decline, researchers found evidence that the Tether coins are then directed by Bitfinex and other leading exchanges toward purchasing more bitcoin, resulting in an inflated price. They studied the period from March 2017 through year-end and found dozens of instances in which the behavior occurs.

Given the regulatory scrutiny that’s on the markets today, it would make sense that if Tether-fueled bitcoin price manipulation were occurring, it would slow down in this environment and thus no rescue for the bitcoin price. But the pressure in the cryptocurrency markets could just be a function of all the uncertainty that’s swirling at the moment.

“I’ve looked at a lot of markets. If there’s fraud or manipulation in a market it can leave tracks in the data. The tracks in the data here are very consistent with the manipulation hypothesis,” Griffin told Bloomberg.

Meanwhile, Bitfinex CEO van der Velde told the publication: “Tether issuance can’t be used to prop up the price of bitcoin nor any other coins/token on Bitfinex.”

Meanwhile, the U.S. Department of Justice is in the midst of a probe to determine whether traders are responsible for previous market gains by manipulating the bitcoin price.

Featured image courtesy of Shutterstock.

Gerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.