‘Stablecoin’ tether, Bitfinex exchange reportedly used to drive up cryptocurrency’s price in 2017 and 2018
By Paul Vigna THE WALL STREET JOURNAL
A single large player manipulated the price of bitcoin as it
ran up to a peak of nearly $20,000 two years ago, a new study concludes.
The
study reviewed the period between March 2017 and March 2018, when the
price of bitcoin soared and its total market value rose to $326 billion.
About half of that increase was due to the influence of a manipulation
scheme, according to the study’s authors.
They said the unknown manipulator operated from a single
account at Bitfinex, the largest cryptocurrency exchange at the time.
The manipulator used another cryptocurrency, called tether, to boost
demand for bitcoin, leading to the price surge.
It isn’t clear by how much or if the manipulator profited. Bitcoin traded at nearly $9,200 on Sunday.
The study—written by
John M. Griffin,
a finance professor at the University of Texas with a background
in forensics, and Ohio State University finance professor
Amin Shams
—was accepted for publication by the influential Journal of
Finance and will be published online Monday. An earlier version of the
study argued tether was being used to manipulate bitcoin prices, but
didn’t connect the scheme to one entity.
The paper doesn’t
definitively conclude who the manipulator was. But it strongly suggests
Bitfinex executives either knew of the scheme or were aiding it.
“If it’s not Bitfinex,” Mr. Griffin said in an interview, “it’s somebody they do business with very frequently.”
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Bitfinex dismissed the study’s findings.
Stuart Hoegner,
the company’s general counsel, said it “lacks academic rigor” and
offered no proof of its claims. “It is the global rise of digital
currency that has driven the market’s demand for tether,” he said.
Bitfinex
and the company that controls tether, called Tether Ltd., have common
ownership and are run by the same executives. Both companies are being investigated for alleged fraud by the Justice Department and the New York Attorney General’s office.
Tether
is similar to bitcoin, but with key differences: Bitcoin trades freely,
while tether’s value is pegged to the dollar via an asset reserve. For
every tether in circulation, there purportedly is $1 in the reserve.
This kind of digital currency is called a stablecoin.
If the
price of bitcoin was manipulated, this would undermine a key feature of
the crypto market, said Mr. Shams. “The promise of a decentralized
financial system was that it would be free from the influence of banks
and governments,” he said. “Ironically, there are large, new entities
that have gained centralized control.”
For their study, the two
professors mapped the entire transaction history of bitcoin and tether, a
process that involved sifting through more than 200 gigabytes of data.
They then traced the movement of the two currencies.
That enabled
then to show how tethers moved across various exchanges and were traded
for bitcoins. Rather than showing a random pattern that would indicate
broad demand, they instead found tethers flowed through tightly
clustered pathways—starting with one large account at
Bitfinex—indicating control by a single entity.
Tether has become primarily an asset used by crypto exchanges
to facilitate trading. About 75% of all bitcoin trading is in exchange
for tethers, according to data from research firm CryptoCompare.
According
to Tether, it creates new units of tether whenever it gets orders from
its customers. But the company has released only limited information to
prove reserves exist. In April, the company revealed in a court filing
that tether was only 74% backed by reserves.
If new tethers were being created in response to orders, then the price of bitcoin would reflect natural demand.
If
tethers were being “printed” without backing, that could lead to
artificial demand if they were used to purchase bitcoin. In some ways
this is akin to central banks or governments printing money to stimulate
economies, often leading to inflation.
The Griffin-Shams study
set out to determine whether tethers were being printed in response to
user demand. The authors laid out and tested a number of hypotheses to
see if Tether’s claims of dollar backing for tethers could be proven or
disproved. The study’s conclusion was tether was being printed
regardless of customer orders.
One pattern was especially
illustrative: The study looked at 95 nonconsecutive hours that comprised
the largest percentage of tether dispersals. This showed a consistent
pattern: In the three hours before those dispersals, the price of
bitcoin was falling. Immediately after the dispersal, the price began
rising. Those 95 hours accounted for 59% of bitcoin’s compounded returns
between March 2017 and March 2018.
“Even a fairly small amount of capital can manipulate the price of bitcoin,” Prof. Griffin said.
To
be sure, the data could have other interpretations: The authors, for
instance, didn’t have access to Bitfinex’s and Tether’s bank accounts.
That information would show definitively whether the companies were
creating new units of tether in response to real customer demand.