THE SPIKE in Bitcoin prices last year that saw the virtual currency peak at almost $20,000 per coin may have been a result of shady price manipulation, a new study has found.
The paper comes from an academic with a track record of spotting fraud in traditional financial markets.
Its arrival has caused the price of Bitcoin to plummet, with the virtual cash valued at $6,417 at the time of writing, down roughly 65 percent from its 2017 high.
The new research suggests that nearly half of Bitcoin's meteoric rise last year was due to artificial inflation using fellow digital currency "Tether": a so-called "stable coin" pegged at one-to-one value with the US dollar.
That means that each of the $2.2billion worth of Tether floating around is supposedly backed by a real US dollar deposit located in a bank account belonging to its creator Bitfinex, a cryptocurrency exchange registered in the British Virgin Islands.
“It is the mother of all crypto criminal scams,” economist Nouriel Roubini wrote on Twitter. “Clear evidence and proof of massive criminal price manipulation. When will the SEC and CFTC indict and put these criminals in jail?”
In their co-authored paper, University of Texas finance professor John Griffin and graduate student Amin Shams probed the relationship between Bitcoin and Tether by examining thousands of transactions on Bitfinex – which are recorded on a public ledger.
The researchers concluded that Tether was used to buy Bitcoin after large price dips in the virtual currency.
Next, they tracked that pattern and found periods of suspicious Bitcoin activity tied to the issuance of Tether.
Griffin found that about 87 hours, or about one percent, of heavy Tether trading could explain 50 percent of the spike in Bitcoin, and around 64 percent of the increase in other major cryptocurrencies like Ether and Zcash.
“We examine whether the growth of a pegged cryptocurrency, tether, is primarily driven by investor demand, or is supplied to investors as a scheme to profit from pushing cryptocurrency prices up,” they wrote.
“Using algorithms to analyse the blockchain data, we find that purchases with tether are timed following market downturns and result in sizeable increases in bitcoin prices. Less than 1 per cent of hours with such heavy tether transactions are associated with 50 per cent of the meteoric rise in bitcoin and 64 per cent of other top cryptocurrencies.”
Analysts have raised the alarm on both Bitfinex and Tether in the past.
Critics like anonymous blogger Bitfinex'ed have been alleging since last year that Tether is being printed out of thin air, without corresponding dollar deposits.
And in January, Roubini predicted that “without this scam” Bitcoin’s price “would collapse by 80 per cent”.
Tether and Bitfinex were also subpoenaed by US regulators in December, again raising fears that the companies may not have the cash reserves they held claim to.
The prices of alternative virtual coins tend to be strongly connected to the price of Bitcoin, meaning that if the manipulation described in the paper turns out to be accurate , it could have severe consequences for the market as a whole.
“Our results are consistent with Tether being pushed out on to the market and not primarily driven by investors’ demand,” wrote Griffin and Shams.
“In this setting, the tether creators have several potential motives.
“First, if the tether founders, like most early cryptocurrency adopters and exchanges, are long on bitcoin, they have a large incentive to create an artificial demand for bitcoin and other cryptocurrencies by ‘printing’ tether. Similar to the inflationary effect of printing additional money, this can push cryptocurrency prices up.
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“Second, the co-ordinated supply of tether creates an opportunity to manipulate cryptocurrencies. When prices are falling, the tether creators can convert their tether into bitcoin in a way that pushes bitcoin up and then sell some bitcoin back into dollars to replenish tether reserves as bitcoin price rises.
“Finally, if cryptocurrency prices crash, tether creators essentially have a put option to default on redeeming tether, or to potentially experience a ‘hack’ where tether or related dollars disappear.”
In response to the report, Bitfinex CEO JL van der Velde said the following in an emailed statement to The Financial Times:
"Bitfinex nor Tether [sic] is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex."