Between March 2017 and March 2018, the media affixed various adjectives to bitcoin’s run: impressive, amazing, historic. Now it’s adding a new descriptor: deceptive.
A new study said an unknown trader on the Bitfinex exchange manipulated Bitcoin’s price so sharply that the scheme accounted for about half of the cryptocurrency's rally, The Wall Street Journal reported.
What Happened
According to professors from the University of Texas and Ohio State University, a single trader used Tether, a cryptocurrency generally used to facilitate bitcoin trades, to boost Bitcoin demand and prices.
They found that Tether Ltd. created Tether units in the absence of customer demand — and typically when Bitcoin prices were falling — so that traders could exchange Their tether for Bitcoin and create artificial demand. This sent Bitcoin prices higher.
“Even a fairly small amount of capital can manipulate the price of bitcoin,” John Griffin, a Texas finance professor and co-author of the report, told the Wall Street Journal.
He found that the 95 hours with the most Tether dispersals between March 2017 and March 2018 contributed 59% of compounded Bitcoin returns.
Who's To Blame?
The study implicates Bitfinex executives as either participants in or knowing observers of the scheme. Tether Ltd. and Bitfinex share owners and managers.
“If it’s not Bitfinex, it’s somebody they do business with very frequently,” Griffin said.
Bitfinex denied the allegations.
“It is the global rise of digital currency that has driven the market’s demand for Tether,” Bitfinex corporate counsel Stuart Hoegner said. He said the study “lacks academic rigor.”
The Justice Department and the New York Attorney General’s office are investigating Bitfinex and Tether over allegations of fraud.
Why It's Important
The revelation of the scheme increases skepticism around a highly speculative market.
“The promise of a decentralized financial system was that it would be free from the influence of banks and governments,” Ohio State University professor Amin Shams, who co-authored the report, told the WSJ.
“Ironically, there are large, new entities that have gained centralized control.”
The Journal of Finance will publish the study results Monday.
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