The value of cryptocurrency’s ringleader Bitcoin fell below $7,000 after two University of Texas academics released a paper on Wednesday claiming that 2017’s high of $19,000 was the result of artificial market manipulation.
In their report “Is Bitcoin Really Un-Tethered?,” finance professor John M. Griffin and graduate student Amin Shams propose that transaction patterns show Tether -- a cryptocurrency token claimed by its creators to be backed by one U.S. dollar for each token issued -- was “used to provide price support and manipulate cryptocurrency prices.”
“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,” Griffin and Shams wrote.
“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.” In a nutshell, trades of Tether were “timed following market downturns” triggering “sizable increases in Bitcoin prices.”
A few players pushing around a whole lot of money
Griffin and Shams’ study shines a light on the possibility that Bitcoin’s price manipulation was precipitated by a handful of cloak-and-dagger players and not genuine demand from investors.
Their analysis of the flow of coins on Bitcoin’s blockchain found that the three main Tether exchanges for most of 2017 -- Bitfinex, Bittrex, and Poloniex -- also created substantial cross-exchange Bitcoin flows among themselves. The Texas researchers concluded that “dubious activities are not just a by-product of price appreciation, but can substantially contribute to price distortions and capital misallocation.”
Bitfinex has been regarded as the largest Bitcoin exchange platform since 2014, with an estimated $700 million daily trading volume. Bitfinex and Tether are also sister companies sharing the same CEO and with “a minority percentage of overlap in shareholders,” according to CoinTelegraph.
The SEC should be happy to hear this
With this report, investors’ patience with cryptocurrency’s rollercoaster ride may have finally hit bottom. Probably to the Security and Exchange Commission’s (SEC) liking, these findings advocate that market monitoring and oversight may be a requisite component of a truly free market.
The SEC’s formation of a cryptocurrency “czar” couldn’t come at a better time, and they’ll have a lot on their plate given this this study’s findings, Apple putting the kibosh on apps that mine cryptocurrency, and the cryptohack of a digital currency exchange that wiped out billions.
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