Study Suggest Bitcoin was Manipulated by Tether Execs to Reach Heights in 2017
On Monday, a study was published online by the Journal of Finance which indicted that during the study period a single large player manipulated the price of bitcoin. The study reviewed the period between March 2017 and March 2018, when the price of bitcoin soared and its total market value rose to $326 billion. About half of that increase was due to the influence of a manipulation scheme, according to the study’s authors (John M. Griffin, a finance professor at the University of Texas with a background in forensics, and Ohio State University finance professor Amin Shams).
They said the unknown manipulator operated from a single account at Bitfinex using another cryptocurrency, called tether, to boost demand for bitcoin, leading to the price surge. It isn’t clear by how much or if the manipulator profited.
The paper doesn’t definitively conclude who the manipulator was. But it strongly suggests Bitfinex executives either knew of the scheme or were aiding it.
“If it’s not Bitfinex,” Mr. Griffin said in an interview, “it’s somebody they do business with very frequently.”
Stuart Hoegner, the Bitfinex’s general counsel, said the study “lacks academic rigor” and offered no proof of its claims. “It is the global rise of digital currency that has driven the market’s demand for tether,” he said.
Bitfinex and the company that controls tether, called Tether Ltd., have common ownership and are run by the same executives. Both companies are being investigated for alleged fraud by the Justice Department and the New York Attorney General’s office.
Bitcoin trades freely, while tether’s value is pegged to the dollar via an asset reserve. For every tether in circulation, there purportedly is $1 in the reserve. This kind of digital currency is called a stablecoin.
If the price of bitcoin was manipulated, this would undermine a key feature of the crypto market, said Mr. Shams. “The promise of a decentralized financial system was that it would be free from the influence of banks and governments,” he said. “Ironically, there are large, new entities that have gained centralized control.”
For their study, the two professors mapped the entire transaction history of bitcoin and tether. They then traced the movement of the two currencies. Rather than showing a random pattern that would indicate broad demand, they instead found tethers flowed through tightly clustered pathways—starting with one large account at Bitfinex—indicating control by a single entity.
If tethers were being “printed” without a $1 reserve that could lead to artificial demand if they were then used to purchase bitcoin. In some ways this is akin to central banks or governments printing money to stimulate economies, often leading to inflation.
The Griffin-Shams study set out to determine whether tethers were being printed in response to user demand. The authors laid out and tested a number of hypotheses to see if Tether’s claims of dollar backing for tethers could be proven or disproved. The study’s conclusion was tether was being printed regardless of customer orders.