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. 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. However, the manipulator did not use Bitcoin, but Tether — a “stablecoin” that in April the company (Tether Ltd.) revealed in a court filing that tether was only 74% backed by reserves.
The most effective commentary is from Paul Vigna for the WSJ: “That enabled them 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.
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.”
Although cryptocurrency advocates decentralization, and the subsequent absence of central banks and governments, monetary expansionary policies (also known as “printing”), can happen even if the data is misinterpreted in the specific study. In more detail, exchanges can engage in various policies or acts that can — and have done so in the past — manipulate prices to the upside, or to the downside.
Disclaimer: Data presented belongs to Waterpier, but opinions do not represent its entirety. For any additional information regarding the content presented above, do contact us and we will respond in a timely manner.
