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Bitcoin's Prospects Worsen After Researchers Find Evidence its Prices Were Artificially Propped Up
Capital Markets, FinTech
Two researches at the University of Texas in Austin have provided evidence to back up the growing concerns among some investors that Bitcoin’s precipitous rise to a record $20,000 last December was artificially manipulated, which could plunge the cryptocurrency’s value even lower than it’s already fallen this year.
John M. Griffin, a professor of finance, and Amin Shams, a graduate student at the University of Texas, released a research paper this week – called Is Bitcoin Really Un-Tethered? – in which they investigated Tether, a digital currency purported to be set to the U.S. dollar, finding that “purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices.” Tether is issued by Bitfinex, a popular digital currency exchange that was subpoenaed in December by the Commodity Futures Trading Commission, a U.S. regulatory agency.
Griffin and Shams looked into whether Tether is “pulled” – demand-driven by investors who own fiat currency – or “pushed” – supply-driven. In the former scenario, the issuance of Tether “facilitates the demand of these investors who value the flexibility of a digital currency and yet the stability of the dollar ’peg’.”
In the latter scenario, Bitfinex issues tether regardless of demand for Bitcoin or other cryptocurrencies from investors who own fiat currency, opening up the possibility that the issuance is being done to prop up prices of Bitcoin. Per the paper:
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 cryptocurrency 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 cryptocurrency 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 cryptocurrency returns that we can take to the powerful blockchain data.
The New York Times notes that Griffin already has a track record of uncovering fraudulent behavior, including “a 2016 paper that suggested that a popular financial contract tied to the volatility in financial markets, known as the VIX, was being manipulated. A whistle-blower later came forward to confirm those suspicions, and now several active lawsuits are focused on the allegations.”
Bitcoin’s value is now “nearly a third” of what it was when it hit its record high of $20,0000 last December, according to CNBC. Boris Schlossberg, managing director of FX strategy at BK Asset Management, tells CNBC that he expects the split between stock prices and Bitcoin will grow wider if Bitcoin continues to crash.
“The $5,000 area is going to be the line between the diehards and the fair-weather fans in bitcoin. If the currency basically drops below that level I think you’re going to see forced liquidation from all ends,” he said.
Bitcoin was trading at $6,602.64 on Thursday afternoon in New York.
Photo: Getty iStock