On Monday, researchers from the University of Texas at Austin published a study indicating that Tether was used to unduly influence bitcoin’s 2017 ascent. Their paper seems to confirm what many have believed for months, if not years, that cryptocurrency markets are susceptible to manipulation.
When the bitcoin price falls, traders and journalists scramble to explain the sudden decline. In the last 24 hours, bitcoin has fallen nearly seven percent, according to CoinMarketCap. The latest reason? A research paper hot off the press at the University of Texas at Austin.
Released on June 13, 2018, the study by professor John Griffin and Ph.D. candidate Amin Shams suggests that Tether (USDT), a digital currency supposedly backed by US dollar reserves, has been used to prop up prices on the Bitfinex cryptocurrency exchange. This has been widely rumored within the cryptocurrency community for ages, but the study lends an air of academic credibility to the claims.
In the paper, Griffin and Shams write, “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.”
Or, in layman’s terms: to counteract price declines, it looks like somebody at Bitfinex is using Tether to buy bitcoin.
Note: Readers may remember that in December, the Commodity Futures Trading Commission subpoenaed Bitfinex and Tether, which have overlapping management teams. And, in January, Tether parted with its auditor, Friedman LLP.
The researchers continue:
“These effects are present only after negative returns and periods following the printing of Tether. Indeed, even less than 1% of extreme exchange of Tether for Bitcoin has substantial aggregate price effects. 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.”
Again, in plain language: in periods right after the bitcoin price falls and Tether mints a bunch more USDT, that’s when it’s clear that somebody (who could it be?!) is artificially pushing the bitcoin price back up. Also, it looks like the activity is more concentrated at certain levels (e.g., near $7,100 as opposed to $7,084). That’s probably because these price levels might be psychologically important. Essentially, if bitcoin falls below a certain threshold, then market participants could be spooked and that could trigger panic selling.
“Proxies for Tether demand receive little support in the data,” Griffin and Shams add, “but our results are consistent with the supply-driven manipulation hypothesis.”
In other words, it looks like cryptocurrency buyers aren’t really interested in Tether, and the researchers are fairly confident that the manufacturing of Tether has a lot to do with bitcoin prices staying high.
“Overall, our findings provide substantial support for the view that price manipulation may be behind substantial distortive effects in cryptocurrencies. These findings suggest that external capital market surveillance and monitoring may be necessary to obtain a market that is truly free,” they conclude.
While Griffin and Shams are rightly receiving press, they are not the first researchers to investigate bitcoin price manipulation. A paper published last year by professor Neil Gandal, Ph.D. candidate J.T. Hamrick, assistant professor Tyler Moore, and MA student Tali Oberman explored suspicious trading activity on MtGox between February and November 2013. ETHNews reported on the group’s finding of trading bots when Gandal presented their results at UC Berkeley’s Cryptoeconomics Security Conference.