While traders looking at markets today might long for the recent past where Bitcoin traded at values upwards of $19,000 USD, a new report suggests that Bitcoin’s recent highs might have been the result of price manipulation.
In a new 66-page document authored by John Griffin and Amin Shams of the University of Texas at Austin’s Department of Finance, a study concludes that a clear link exists between the ‘printing’ of new Tether tokens at Bitcoin’s most bullish price movements.
As the paper itself claims, “by mapping the blockchains of Bitcoin and Tether, we are able to establish that 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.”
Griffin and Shams attest that “even less than 1 percent of extreme exchange of Tether for Bitcoin has substantial aggregate price effects” – and following Bitfinex’s decision to cut Tether’s supply earlier this year, all indicative patterns ceased.
Griffin and Shams noted their ability to “cluster groups of related bitcoin wallets”, which accordingly enabled the duo to monitor Tether’s distribution and according market effects.
Both authors described that “Tether is created, moved to Bitfinex, and then slowly moved out to other crypto-exchanges, mainly Poloniex and Bittrex” – and furthermore noted that exchanges which accommodated Tether saw both Ethereum and Zcash price surges, while exchanges that did not support Tether witnessed neither.
As Griffin and Shams note, “less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies.”
If true, Griffin and Sham’s work would corroborate fears of Tether’s impact on cryptocurrency markets. The duo note that “the flow clusters below round prices, induces asymmetric autocorrelations in Bitcoin… suggests incomplete Tether backing before month-ends. These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.”
In December of 2017 – the period wherein Bitcoin soared to its highest levels yet – the US Commodity Futures Trading Commission subpoenaed both Bitfinex and Tether over concerns that the firms had manipulated the prices of several cryptocurrencies.
I’m not saying Tether is a fraud. It was supposed to be a foundation that tokenized the usd to get more inflow into crypto. Today it is owned by the BFX guys. The mkt cap is 1,6bn, this is approx 3% of all fiat inflows into crypto. It’s a significant number/risk.
— Ran NeuNer (@cryptomanran) January 25, 2018
The Commission’s efforts were stifled, however, given the fact that Bitfinex is registered in the Carribean and is physically based in Hong Kong.
While Griffin and Sham’s work face criticism for the fact that neither provided contactable information with the release of the paper, other academics have defended the paper.
In a statement to the New York Times, Christian Catalini – a professor at the Massachusetts Institute of Technology specializing in blockchain research – quipped that “…the relationship between Tether and the price of Bitcoin has been flagged for months within the community… It is great to see academic work trying to causally assess if market manipulation is taking place.”
It remains uncertain as to whether authorities will proceed to investigate the allegations made within the paper. However, the body of work is not the first time academics have pinpointed manipulation in digital currency markets.
A paper first published last year alleged that Bitcoin’s previous price bender in 2013 was the result of a ‘campaign of price manipulation’ spearheaded by Mt Gox.