The $700 Billion Question

As losses in the crypto universe continue to mount, U.S. regulators are once again asking whether last year’s bull market was artificially inflated. According to Bloomberg, the federal probe is intensifying now that bitcoin’s price floor has been severely breached.

Tangled Web

As Hacked previously reported, federal prosecutors have uncovered a suspicious relationship between Bitfinex, Tether and bitcoin. To recap: Bitfinex is one of the world’s largest cryptocurrency exchanges and Tether is the company behind the controversial USDT stablecoin. Both companies share the same executives and were part of a federal subpoena last year.

The U.S. Department of Justice suspects that Bitfinex and USDT may have been used to inflate bitcoin’s price, which peaked north of $19,500 last December. Since USDT is the quote currency on a large volume of bitcoin trades, Tether may have printed and released more units of the token on Bitfinex at crucial moments throughout 2017. Tether’s lack of transparency fueled suspicion that the company didn’t have the reserves to back up the number of tokens it had in circulation. (As a dollar-backed stablecoin, Tether claims to have a dollar-USDT ratio of one-to-one.)

Tether allayed those concerns earlier this month by announcing a new banking relationship with Deltec Bank & Trust, a Bahamas-based financial institution. However, from the perspective of investor sentiment, the damage may have already been done.

Recently, the U.S. Securities and Exchange Commission (SEC) slapped civil penalties on two cryptocurrency companies that failed to register their initial coin offerings as securities. The SEC’s regulatory clampdown, combined with the year-long downturn in market prices, has put the ICO market on ice over the past four months.

U.S. regulators, including the Commodity Futures Trading Commission (CFTC), are also reportedly investigating the impact of spoofing on digital currency trades. The illegal practice involves flooding the market into fake orders to trick other traders into buying or selling a particular asset.

Futures Trading Spikes

Bets against bitcoin have skyrocketed over the past week, as evidenced by the open interest in futures contracts. According to Bloomberg, the combined open interest in bitcoin futures operated by CME Group and CBOE reached an equivalent of 22,266 bitcoin on Monday, the highest on record.

BitMEX, a popular cryptocurrency derivatives platform, has seen an upsurge in trading volume amid the market downturn. As of Tuesday, the platform processed more than 41% of bitcoin trades placed on virtual currency exchanges, according to CoinMarketCap. That’s equivalent to roughly $3.6 billion, based on today’s volumes. As Hacked previously mentioned, trading in over-the-counter markets is likely equivalent to the orders placed on virtual currency exchanges. This means there’s a lot going on behind the scenes that data feeds like CoinMarketCap do not reveal.

The bitcoin price plunged below $4,300 on Tuesday, setting a new 13-month low. This has contributed to a much wider selloff in the crypto universe, with the total market capitalization of all coins reaching a low of $140 billion earlier in the day. That represents a decline $71 billion over seven days.

Since peaking above $840 billion in January, the crypto market cap has lost a staggering $700 billion. Gains and losses of this magnitude will continue to fuel speculation that manipulation is at least partly responsible for the shake-up in prices.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi