The Crypto Cartel: Inside Bitcoin’s Rise And Fall From $300B

New findings from the latest research by a finance expert may well weigh on the price of bitcoin for some time.

The study titled 'Is Bitcoin Really Un-Tethered?' was conducted by a University of Texas finance professor together with a graduate student and provides pretty compelling evidence that a cryptocurrency known as Tether was used to manipulate Bitcoin in 2017 and was behind the mad rally that took prices from $800 to nearly $20,000 in a matter of months.

Specifically, Tether was used to purchase Bitcoin during market downturns thereby artificially propping up prices.

Tether is a cryptocurrency created by crypto exchange Bitfinex in 2015. And it’s very much unlike any crypto in the market today because it's directly pegged to the U.S. dollar.

In other words, while the price of a crypto like Bitcoin can climb or fall several hundred dollars every day, the price of a single Tether rarely deviates far from a buck.

Tether Ltd (the company behind Tether and possibly fully owned by Bitfinex), claims to hold a dollar in hard currency for every Tether it issues, which is pretty similar to how the Fed backstops dollars with gold. The claim has been severally disputed though never successfully disapproved.

The whole idea was to create a cryptocurrency that enjoys the relative price stability of the dollar but with the superior operational ability of crypto.

Source: CoinMarketCap

The good professor tracked millions of cryptocurrency transactions last year and discovered 85 distinctive patterns that cannot be explained using the usual market forces, including investor demand proxies. Instead, the patterns seemed to revolve around the strategic use of Tether.

But here's the real clincher--not only was Tether used to stabilize and manipulate Bitcoin prices but other cryptocurrencies, too, to an even greater degree.

The paper's abstract puts it this way:

“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. 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.”

The paper gets a bit technical with statistical jargon, but here's another excerpt:

“The flow clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests incomplete Tether backing before month-ends. These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.”

The bottom line: It was a well-choreographed move to inflate Bitcoin prices thus giving the manipulators an opportunity to cash out acquired Bitcoins in dollars, likely on an obscure exchange and at a slower pace to avoid upsetting the price dynamics.

Interestingly, Chainalysis, another independent research firm which issued its own overview of Bitcoin money supply trends to the New York Times last week, backed up the claims by the University of Texas report, terming them 'credible.'

Bitcoin Bubble Burst

Perhaps it's not by chance that the huge collapse in Bitcoin and crypto prices coincided with a U.S. regulatory subpoena in January.

Just like the rally was hard to explain using normal market forces of supply and demand, the sharp declines are also hard to rationalize through normal headwinds such as normal profit-taking or regulatory crackdowns in markets across the globe.

The latest findings suggest that external capital market monitoring and surveillance can no longer be wished away if the crypto market is to truly attain its full potential.