In a research paper published today, authors John M. Griffin and Amin Shams from the Department of Finance at the University of Texas claim to have found a link between Tether and Bitcoin that shows market manipulation on the later. Market manipulators have used the Tether USDT token to artificially inflate the price of bitcoin for the recent bull run at the end of 2017.
Tether is a stablecoin that is allegedly backed by the USD in a 1:1 ratio for each token created. This requires finding banking partners and achieving regulatory compliance to offer fiat-to-crypto trading pairs. Tether becomes a proxy for physical USD.
Griffin and Shams argue that Tether has been used to provide price support for bitcoin during market downturns.
Overall, we find that Tether has a significant impact on the cryptocurrency market. Tether seems to be used both to stabilize and manipulate Bitcoin prices.
[w]e are able to establish that entities associated with the Bitfinex exchange use Tether to purchase Bitcoin when prices are falling. Such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention. These effects are present only after negative returns and periods following the printing of Tether.
It's possible this is just a correlation based on honest trading and practices, but researchers suggest that Tether is not always backed by a 1:1 ratio of USD for each token created. I've been told before that the amount of Tether that exists exceeds the USD backing those coins actually have through exchanges. This research seems to back that up.
Tether seems to be issuing unbacked tokens to help provide support for bitcoin and prop it up in the markets. They buy bitcoin to make the price spike, then later at the end of the month BTC is sold to fully back the outstanding USDT.
Tether is coming under the eye of federal regulators. The US Commodity Futures Trading Commission apparently sent a subpoena in December 2017 to Tether and the closely affiliated crypto exchange Bitfinex. The authors of the research indiate that surveillance and monitoring of the crypto markets "may be necessary to obtain a market that is truly free" in order to prevent "dubious activities" and "price distortions":
These findings suggest that external capital market surveillance and monitoring may be necessary to obtain a market that is truly free. More generally, our findings support the historical narrative that dubious activities are not just a by-product of price appreciation, but can substantially contribute to price distortions and capital misallocation.
It seems like they are recommending more oversight, i.e. regulation and control, over the cryptocurrency markets in order to keep things honest. Since most if not all of the trading is done on exchanges, regulators and law-makers can interject their authority into the exchanges to prevent market manipulations. But what other controls are they going to apply? Is this a sign of the dying dream of crypto freeing us from the clutches of the system?
References:
- Is Bitcoin Really Un-Tethered?
- Tether Used to Manipulate Price of Bitcoin During 2017 Peak: New Study
- Tether Manipulation Pushed Up Bitcoin's Price, Researchers Find
- Researchers Reach Obvious Conclusion That Bitcoin's Price Was Artificially Inflated
- Bitcoin Price was Manipulated by Tether, Researchers Claim
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