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There is Now Growing Concern That the Price of Bitcoin is Being Artificially Manipulated
Capital Markets, FinTech
Bitcoin briefly plunged below $8,000 on Friday for the first time since November, as the 2018 slump for cryptocurrencies continued, leading economist Nouriel “Dr. Doom” Roubini to call it the “biggest bubble in human history,” according to Bloomberg.
But while Roubini tells Bloomberg Television that the “mother of all bubbles” is now crashing, some investors are worried about something else entirely: That the price of Bitcoin, which surged to record highs last year, is being “artificially propped up” by a popular exchange called Bitfinex, the New York Times reports. Bitfinex was subpoenaed in December by the Commodity Futures Trading Commission, a U.S. regulatory agency.
Bitfinex issues a a virtual currency called Tether, the Times notes, that – unlike most cryptocurrencies – is backed by traditional money, in this case the U.S. dollar. One dollar is equal to one Tether – and new Tether coins are issued when investors give Bitfinex dollars, according to the Times.
In recent months, however, many investors have been raising alarm bells about Tether. Hundreds of millions of dollars worth of new Tether were created; almost always when the prices of other virtual currencies were heading down. The Tether were used on the Bitfinex exchange to make big purchases of Bitcoin and other tokens, helping push their prices back up, according to multiple analyses of data from Bitfinex.
“This became more and more concerning, because every time the markets went down, you have seen the same thing happen,” said Joey Krug, the co-chief investment officer at Pantera Capital, which runs several virtual currency hedge funds. “It could mean that a lot of the rally over December and January might not have been real.”
There is also concern among investors that Bitfinex lacks transparency and has mysterious origins: It has “European executives, offices in Asia and registration in the Caribbean,” the Times reports. There is also fact that Bitfinex had “contracted with an American firm, Friedman, to audit its records and prove that its operation of Tether is above board,” but then cut ties with the firm before the audit was completed.
All of this adds up to growing suspicions among investors and analysts. Per the Times:
Market analysts have grown particularly concerned with the rapid pace at which new Tether have been issued and their timing. In a single week in mid-January, $450 million new Tether were created, bringing the total amount of Tether to more than $2 billion.
Several anonymous reports circulating among traders, including one posted to a website last week, have pointed to data from Bitfinex itself, showing that the price of Bitcoin has frequently gone up soon after new Tether were created, generally as a result of big trades on Bitfinex.
“This absolutely reeks of price manipulation,” a security researcher and market analyst, Tony Arcieri, wrote on his blog in mid-January.
Defenders of Bitfinext and Bitcoin have argued that the price increases could mean that traders are simply adhering to the old market adage of buying low, the Times notes.
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