Last year’s meteoric rise in the value of Bitcoin and other cryptocurrencies might well have been artificially inflated, according to a paper released on Wednesday by University of Texas finance professor John Griffin and graduate student Amin Shams.
The suspected culprit: people using Tether, one of the most-traded cryptocurrencies, to buy bitcoin when the price dips:
Tether seems to be used both to stabilize and manipulate Bitcoin prices.
Bitcoin hit a 16 December 2017 peak of $19,343 before it bumped and thumped on down to USD $6,591.94 (the current price as of writing).
That’s a massive deflation, but it’s looking like the inflation itself might have been based on little besides hot air and market manipulation. According to Griffin, the drive up to nearly $20,000 was likely manipulated by coordinated purchases of bitcoin when they were selling low at exchanges. And according to the New York Times, Griffin knows what he’s talking about: he has a history of spotting financial fraud.
The paper, which attempts to causally determine if price manipulation is taking place, suggests that a concentrated campaign may account for half of last year’s spiked cryptocurrencies prices.
Griffin came to this conclusion after studying the flow of digital tokens in and out of Bitfinex, once the world’s largest bitcoin-dollar exchange. He identified several distinct patterns that suggest that someone, or someones, at Bitfinex managed to push up prices when they sagged at other exchanges. They did it by buying up other cryptocurrencies with Tether: a virtual currency created and sold by Bitfinex’s owners.
…entities associated with the Bitfinex exchange use Tether to purchase Bitcoin when prices are falling. Such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention. These effects are present only after negative returns and periods following the printing of Tether. … The buying of Bitcoin with Tether also occurs more aggressively right below salient round-number price thresholds where the price support might be most effective.
For months, virtual currency investors have been worried that prices have been artificially jacked up by Bitfinex, which has a history of problems.
The exchange was robbed in 2016 of nearly 120,000 bitcoins – worth up to $72 million at the time.
Beyond the bitcoin loss, Bitfinex has a history of trouble with regulators: in December, it was reportedly subpoenaed by the US regulatory agency Commodity Futures Trading Commission (CFTC) along with Tether. Tether is the exchange’s so-called “stablecoin,” with a value pegged to traditional money – specifically, the US dollar. One Tether token is worth USD $1.
According to Coindesk, online critics have long alleged that Tether has been issuing more tokens than it has dollars in the bank in order to drive up the price of bitcoin.
Weiss Ratings – an established investment research firm that recently began evaluating cryptocurrencies – claims that Tether poses a risk to the entire cryptocurrency ecosystem. While many exchanges use Tether as an equivalent to the USD, it has reportedly never been audited. The people behind Tether claim that the tokens are backed 100% by actual dollars.
Tether’s trading volume “regularly exceeds that of its market cap.” That’s not good, according to the research firm:
This means the entire Tether supply changes hands regularly, sometimes more than once a day… This is important to know because it tells us that Tether is used for trading A LOT. It’s one of the main sources of liquidity in the cryptomarkets.
Has this liquid virtual currency been used to artificially pump up cryptocurrency prices?
Griffin thinks his research points to “You betcha.” The Times quotes him:
There were obviously tremendous price increases last year, and this paper indicates that manipulation played a large part in those price increases.
Bitfinex has denied such allegations in the past. Griffin and Shams, meanwhile, have no smoking gun: no incriminating emails or documents to show that Bitfinex knew about or brought about price manipulation.
All they have are the public ledgers of virtual currency transactions – in particular, that of Tether – and the patterns that have emerged. What they found: half of the 2017 increase in Bitcoin’s price can be traced to the hours immediately after Tether flowed to a handful of other exchanges, generally when its price was falling.
The value of other virtual currencies that can be purchased with Tether – including Ether and Zcash – rose even faster than that of Bitcoin during those periods. The authors also found that prices rose much more quickly on exchanges that accepted Tether than on those that didn’t. When Bitfinex stopped issuing new Tether this year, the authors found that the pattern halted.
The Times spoke with multiple experts who said that Griffin’s work seems credible.
MIT Professor Christian Catalini said it’s great to see academic work that tries to “causally assess if market manipulation is taking place” after months of the Tether/Bitcoin relationship being flagged in the cryptocurrency community.