Study: Tether Likely Used to Manipulate Half of Bitcoin’s Rises in 2017
Two researchers out of the University of Texas at Austin (UTA) have published a paper arguing they’ve identified patterns that provide further evidence the cryptoverse’s lightning rod dollar-pegged stablecoin Tether (USDT) was used to both manipulate and support bitcoin’s unprecedented bull run in the second half of 2017. Allegations of such reached a fever pitch at the end of last year but have died down in 2018’s bearish market chop. The grand questions now are: is it true, and if so, what’s next?
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‘These Patterns Cannot Be Explained By Investor Demand Proxies,’ Says Researchers
A professor and a graduate student out of UTA’s Department of Finance — John M. Griffin and Amin Shams respectively — have just published a paper entitled “Is Bitcoin Really Un-Tethered?” In it, the researchers argue that the dollar-pegged USDT cryptocurrency has been used to systematically manipulate bitcoin’s price.
Per the paper’s abstract:
“Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. 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. The flow clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests incomplete Tether backing before month-ends. These patterns cannot 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.”
To say the least, the argument outlined above is a shot across the space’s bow, particularly as bitcoin and the rest of the cryptoeconomy have been slipping further as of late into an acute downward bearish trend.
Looking at the Nuts and Bolts
NYT’s Nathaniel Popper described the research as hailing a “concentrated campaign of price manipulation.” Bloomberg similarly said the research suggested USDT had been used to “drive the world’s first digital asset to a record price in December.” So let’s take a deeper look and see how Griffin and Sham arrived at their conclusions.
First, the researchers highlight 87 hours wherein USDT manipulation on the bitcoin price was seemingly specifically occuring:
“To illustrate the potential magnitude and predictive effect of Tether issuances on Bitcoin prices,we focus on the hours with the largest lagged combined Bitcoin and Tether flows on the two blockchains. These 87 hours have large negative returns before the flows but are followed by large return reversals. These 87 events account for less than 1% of our time series (over the period from the beginning of March 2017 to the end of March 2018), yet are associated with 50% of Bitcoin’s compounded return, and 64% of the returns on six other large cryptocurrencies (Dash, Ethereum Classic, Ethereum, Litecoin, Monero, and Zcash). A bootstrap analysis with 10,000 simulations demonstrates that this behavior never occurs randomly.”
There are two interesting takeaways from the last two sentences here. First, the researchers note that other top currencies like Ethereum (ETH) and Litecoin (LTC) were also apparently experiencing such manipulation. Secondly, their modeled simulations suggest the phenomenon they were looking at was not occurring randomly.
Next, the duo highlights how the activity described above appeared to be directly linked with Tether activity:
“Consistent with Tether being used to buy Bitcoin when prices drop, we find a statistically and economically strong reversal in Bitcoin prices, but only following negative returns. The Bitcoin reversal did not exist before Tether was prevalent in the market and disappears during the period when Tether stops being printed.”
Griffin and Sham go even further, arguing that their results are “consistent” with a few things, such as crypto exchange Bitfinex — which shares its CEO J. L. van der Velde with Tether — possibly having worked to establish price floors for bitcoin last year to “induce other traders to purchase”:
“The results are consistent with the Tether issuers pushing out Tether to stabilize the price of Bitcoin, but we investigate these issues further. Investors hoping to stabilize and drive up the price might concentrate on certain price thresholds as an anchor or price floor. This follows the idea that if investors can demonstrate a price floor, then they can induce other traders to purchase. Interestingly, Bitcoin purchases by Bitfinex strongly increase just below multiples of 500. This pattern is only present in periods following printing of Tether and not observed by other exchanges. To address causality, we use the discontinuity in Tether flow at the round threshold cutoffs as an instrument to measure the effect of Tether on Bitcoin prices. The instrumental regression results are even stronger, indicating that Tether flows are causing the positive return.”
Consequently, the researchers concluded that Tether may not be backed 1:1 with “dollars when issued” and that the stablecoin’s issuers had seemingly used bitcoin liquidations to “shore up” their reserves:
“If Tether is pushed out to other crypto exchanges rather than demanded by investors with dollars in hand, Tether may not be fully backed by dollars when issued. However, if the issuers wished to post monthly bank statements to shore up dollar reserves and appear fully backed, this would necessitate the liquidation of the purchased Bitcoins at the end-of-the-month (EOM). Interestingly, we find a significant negative EOM abnormal return of 6% in the months with strong Tether issuance. The EOM Bitcoin returns are highly correlated with the magnitude of Tether issuance, and no abnormal returns are observed in months when Tether is not issued.”
Looking Ahead from Here
Back in December 2017, both Bitfinex and Tether were subpoenaed by the U.S. Commodity Futures Trading Commission (CFTC) — over what exactly, it wasn’t then clear. The firms commented at the time that they “routinely receive legal process from law enforcement agents and regulators conducting investigations.”
What is clear, however, is that increased attention has been mounting upon both Bitfinex and Tether in several ways, Griffin and Sham’s paper being just the latest example. Both researchers had previously worked to uncover manipulation in Wall Street’s VIX Volatility Index, so their credentials are respected.
Back in May 2018, Bitfinex’s financial dealings came into closer focus as it was reported that Puerto Rico’s Nobel Bank International had been providing services to the exchange since 2017. In that same hyperlinked report, Bitsonline noted the flip side of the Bitfinex/Tether debate in highlighting Oleksandr Ivanov’s research, albeit in qualified fashion:
“Oleksandr Ivanov, a Ph.D-candidate at the University of Gronigen, did a statistical analysis and found no correlation between the creation of new Tether and an increase in the price of Bitcoin. However, it should be noted that Ivanov used CoinMarketCap data in his study. CoinMarketCap has historically been slow to update their Tether market cap data. which could have affected his findings.”
So it’s not immediately clear what to think, or who’s right and who’s wrong. But Griffin and Sham’s research is troubling and rigorously produced, which should cause everyone in a space as complex as the cryptoverse to pause and take stock.
What’s your take? Are you concerned or not by this new research? Let us know what you think in the comments below.
Images via Hacked, Pixabay