In Wednesday's Daily Market Commentary webinar I was asked a few questions about bitcoin and its continued decline. The latest reason? A research paper hot off the press at the University of Texas at Austin.
The paper by John Griffin, a finance professor at the University of Texas who has researched fraud in other markets, and graduate student Amin Shams, found that the virtual coin Tether was likely used to prop up Bitcoin prices late a year ago. This has been widely rumored within the cryptocurrency community for ages, but the study lends an air of academic credibility to the claims.
Tether, a purportedly dollar-pegged cryptocurrency, was apparently used to obscure bitcoin purchases in ways that would push prices higher when there were no other market catalysts that could explain the cryptocurrency's rally. These patterns can not 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.
The Commodity Futures Trading Commission subpoenaed both Bitfinex and Tether in December, over concerns about if Tether is actually by the reserve of US dollars it claims it has. And, in January, Tether parted with its auditor, Friedman LLP.
Bitfinex executives have previously issued denials in the past that the exchange was involved in any manipulation and the new allegations presented in the paper have been refuted by the CEO of Bitfinex, JL van der Velde, who said: "Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation".
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The flow clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests incomplete Tether backing before month-ends.
The researchers noted that the "bitcoin reversal did not exist before Tether was prevalent in the market and disappears during the period when Tether stops being printed". That's probably because these price levels might be psychologically important.
"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". 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.
There is mounting evidence that the market for bitcoin had an extremely asymmetric information flow and was likely manipulated into the rally a year ago. "These findings suggest that external capital market surveillance and monitoring may be necessary to obtain a market that is truly free", they conclude.