Was late 2017 cryptocurrency spike artificially inflated?

A new report stemming from the University of Texas at Austin claims that the big surge in cryptocurrency values during 2017 was artificially created using a digital currency called Tether. Written by finance professor John Griffin and graduate student Amin Shams, the report focuses on Bitfinex, one of the largest unregulated digital currency exchanges on the market. Its owners are also the creators of Tether. 

By December 19, 2017, the price of a Bitcoin surged up to $19,549 and then tanked to $6,417 in early February. Since then, Bitcoin’s value has peaked slightly above $11,000 but thereafter continued to take a slow drop to the current price of $6,592. Other cryptocurrencies experienced a similar rise and fall, such as Ethereum skyrocketing to $1,334 on January 10 and then down to the current value of $477. 

Griffin and Shams examined digital currency exchanges during the highest peaks and noticed unusual activities stemming from Bitfinex. According to the report, patterns indicated that one or more individuals were intentionally pushing digital currency values higher on other exchanges that had sagging prices. To inflate these values, they purchased the low-value cryptocurrency using Tether. 

For instance, when Bitcoin’s price would fall, purchases used with Tether increased. When Bitcoin would begin to surge, Tether usage didn’t decrease as expected. According to Griffin, the pattern suggests that someone or a group of individuals were purposely using Tether to “protect Bitcoin prices during downturns.” 

Data used by the research is based on millions of transaction records stored in public ledgers, or blockchains. This data showed that half of the digital coin value spike in 2017 took place within hours after a batch of Tether coins began hitting cryptocurrency exchanges. Coincidentally, Tether entered the exchanges when cryptocurrency prices were plunging. 

“I’ve looked at a lot of markets,” he said. “If there’s fraud or manipulation in a market it can leave tracks in the data. The tracks in the data here are very consistent with a manipulation hypothesis.” 

The 66-page paper originally set out to understand how Tether flows through the currency markets. Parent company Tether Ltd. supposedly creates Tether coins in batches of 200 million and moves them to Bitfinex. Currently there are 2.5 billion coins in circulation, and each trades at $1 because each digital coin is backed by $1 stored in a real-world bank. It’s an alternative to the volatile cryptocurrency market while providing the security benefits of digital currency.

Naturally Bitfinex denies these allegations. 

“Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation,” Bitfinex Chief Executive Officer JL van der Velde said. “Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.” 

Bitfinex is registered in a Caribbean jurisdiction but reportedly has offices in Asia. The U.S. Commodity Futures Trading Commission sent subpoenas to both Bitfinex and Tether on December 6, 2017 as cryptocurrency values continued to rocket skyward. At the time, Tether said it was hacked and lost around $30 million in digital coins. Tether had yet to provide any proof that it had money in reserve to back its digital currency. 

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