It’s been rough for crypto enthusiasts lately. The heady days of December are quickly fading from memory. When bitcoin approached the $20,000 threshold and a brave new future of digital, decentralized currency not backed by banks or states seemed all but assured.
Months of persistent price weakness, exchange hacks and fears that many bitcoin miners are operating at a loss have brought back the fear, uncertainty and doubt. (Or “FUD,” in crypto-speak.) Bitcoin tested a low of $6,252 this week—returning to levels not seen since November.
And now, a new paper by finance professor John Griffin and graduate student Amin Shams of the University of Texas at Austin suggests that bitcoin’s Icarus-like rise could’ve been built on a lie. That Tether, a “stable coin” that claims to be redeemable (not just tradeable, via an exchange) into US dollars, was a source of fraudulent buying demand that drove about half of the rise in bitcoin in late 2017.
A charge that plays into the critics’ concerns about the risks of an unregulated, opaque industry that got its start facilitating dark-web transactions in drugs on Silk Road.
Using algorithms to analyze blockchain data, the researchers found that bitcoin purchases with Tether “are timed following market downturns and result in sizable increases in Bitcoin prices.” Less than 1% of hours with heavy Tether-into-bitcoin transactions are associated with periods when bitcoin prices were rising. Moreover, the purchases were clustered below round prices (e.g., $10,000) and suggest “incomplete Tether backing.”
Translation: It looks like the people behind Tether were using freshly created Tethers to bolster the price of bitcoin. Often, with Tethers that weren’t backed, one-for-one, by US dollars held in reserve.
Untangling the story is a trip down a binary rabbit hole.
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