Bitcoin’s phenomenal price rise late in 2017 has been attributed to a lot of things: investor enthusiasm, media spotlight, and Asian exchanges. A new paper by an academic famous for spotting fraud claims that the cryptocurrency’s valuation was pumped up through the use of Tether, a coin that trades on parity with the US dollar at three exchanges: Bitfinex, Bittrex and Poloniex. It is issued by Bitfinex, which claims to have dollar reserves in a bank account that are equivalent to the coin’s trading activity. This helps maintain a stable exchange price with the US dollar.
The paper is titled Is Bitcoin Really Un-Tethered? and is written by John M. Griffin, a professor of finance at the University of Texas and Amin Shams, a graduate student at the same university. They found that 87 hours of trading (amounting to 1 percent of total trading activity) of Tether could be responsible for a 50 percent rise in the price of bitcoin. Griffin told CNBC that Tether trading created price support for bitcoin and had “huge price effects.” "Our research would indicate that there are sophisticated people harnessing investor interest for their benefit,” he said. Both Griffin and Shams had earlier authored a paper that alleged manipulation in Wall Street's volatility index VIX. Those allegations are being investigated after a whistleblower confirmed them.
The paper focused on the “push” (that is, driven by an increase or decrease in its supply) and “pull” (that is, driven by investor demand for Tether) nature of Tether trading. “Following periods of negative bitcoin return, Tether flows to other exchanges (from Bitfinex),” the paper’s authors write. In other words, Bitfinex pushes Tehter immediately after a slump in its price. “These flows seem to have a strong effect on future bitcoin prices,” the study’s authors write. According to them, the pushing of Tether is mainly present in two instances: after periods of negative returns and periods following Tether printing.
Bitfinex CEO J.L. van der Velde denied the paper’s claims and told CNBC that “Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation.” He added that "Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex."
A Slew of Accusations
This is not the first time that Tether has been accused of propping up cryptocurrency markets. A Twitter account called Bitfinex’ed regularly published reports that claimed to provide evidence of the correlation between bitcoin’s price and Tether issuance. The CFTC also issued subpoenas to Bitfinex and Tether in December this year to investigate similar claims. Bitfinex is yet to show credible proof that Tether tokens in crypto markets, which amount to 2.5 billion as of this writing, are backed by an equivalent amount of US dollars. (See also: Bitcoin Prices React To Tether Subpeona).
The accusations have not had much effect on Tether’s price or market capitalization, which has continued to rise. However, they have created a market for an alternative stablecoin, one which is accompanied by controversy and is auditable in a transparent manner. Several startups have already jumped into the fray. The most notable of these is Basis, a stablecoin backed by marquee venture capital names. Goldman Sachs–backed Circle has partnered with Bitmain, the world’s biggest crypto miner, to develop US Dollar Coin (USDC), a stablecoin that will be governed by a non-profit. (See also: Circle, Bitmain To Launch US Dollar Cryptocoin).
Meanwhile, the paper concludes with a note for more regulation. “Our findings suggest that market surveillance within a proper regulatory framework may be needed for crypto markets to be legitimate stores of value and a reliable medium for fair financial transaction,” the paper’s authors write.
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