A new paper published on the Social Sciences Research Network by John M Griffin and Amin Shams from the department of finance at the University of Texas at Austin has concluded that Tether was used to artificially manipulate Bitcoin’s price during the historic rally to USD 20,000.
The United States Commodities Futures Trading Commission already sent subpoenas to Tether and Bitfinex on 6 December 2017 during the height of the Bitcoin rally, possibly for the market manipulation that this new study has found, but this has yet to be confirmed. Tether and Bitfinex both have the same CEO, Jan Judovicus van der Velde.
Tether is solely issued by Bitfinex and this is often done in large batches. Each Tether is supposedly backed by USD 1 in the Tether limited reserve, but the reserve did not publicly audit its reserves using a reputable third party as originally promised. Tether may be redeemed for USD through the Tether platform. This cast doubts on whether the new Tether issued during Bitcoin’s last climb to an all-time high were indeed backed by USD. The newly published study argues that these billions of USD of Tether were “printed” to prop up the entire cryptocurrency market.
The researchers found that outflows of Tether from Bitfinex coincide with market downturns, and result in significant Bitcoin price increases when the Tether reaches other exchanges. These high-volume Tether outflows occur less than 1% of the time but correlate with 50% of the Bitcoin price rise and 64% of price increases for other cryptocurrencies such as Ethereum and Zcash.
This pattern is consistent with Tether being used to support and manipulate cryptocurrency prices. Sarah Meiklejohn from the University College London, an expert at this sort of pattern analysis, says the research in this paper seems sound, while the chief economist at Chainalysis, Philip Gradwell, says this research seems credible. Christian Catalini, a blockchain researcher at the Massachusetts Institute of Technology, says it is great to see academic work on the relationship between Tether and Bitcoin’s price since there have been suspicions for months.
John M Griffin has been successful at spotting fraud using market data in the past. In 2016, he found that a popular financial contract tied to the volatility index (VIX) was being manipulated, and his findings were later confirmed.
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