Tether may be linked to bitcoin price manipulation: report
The study used algorithms to determine three different ways Tether can be used to manipulate bitcoin prices.
A new research report suggests that Tether, a digital currency reportedly pegged to the US dollar, may have been used to influence the price of bitcoin and other cryptocurrencies during the recent price explosion.
The report, Is Bitcoin Really Un-Tethered?, applied algorithms to analyze blockchain data and discovered that purchases with Tether followed market downturns and resulted in significant increases in bitcoin prices.
The report proposes that cryptocurrency exchange Bitfinex may have used Tether, a company with the same management team, to induce fake demand for bitcoin. The study explains three different ways that Tether can be used to manipulate bitcoin prices.
- 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 crypto prices up.
- Second, the coordinated 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 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. Both the ‘pushed’ and ‘pulled’ alternatives have different testable implications for flows and returns that we can take to the blockchain.
The research found that less than 1% of hours with substantial Tether transactions are associated with half (50%) of considerable rise in bitcoin and the majority (64%) of other leading cryptocurrencies.
However, the report cannot definitively prove price manipulation. Patterns suggest that exchanges with support for Tether saw prices of alternative coins increase more than on exchanges that did not support Tether.
In January, the United States Commodity Futures Trading Commission (CFTC) reportedly issued subpoenas to Hong-Kong based digital currency exchange Bitfinex and self-proclaimed “stablecoin” Tether in December.
Tether claims to offer a stable alternative and potential substitute for unreliable exchange and wallet audits. The company lists its current balances on its website, divulging total liabilities and shareholder equities. There are currently US$2.53 billion worth of Tether assets in circulation, according to Tether’s transparency data.
In September last year, Tether engaged accounting firm Friedman LLP to perform historical balance sheet checks. A memo published later that month on Tether’s website revealed Friedman’s initial findings. As of September 15, company reportedly had US$443 million and €1,590 stored in undisclosed bank accounts. On the same day, Tether’s tokens were valued at approximately US$420 million, according to CoinMarketCap.
However, the data was limited to just one report, as Tether severed ties with Friedman LLP earlier this year.
However, a report released in February by Hong Kong-based cryptocurrency trading platform BitMEX has found possible published evidence that Tether’s network is backed by fiat currency in Puerto Rico’s banking system.
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