The price of bitcoin plunged last Wednesday after researchers published a report suggesting that part of the currency’s massive surge in 2017 was manipulated by a few people behind another, lesser-known, digital coin: Tether.
But not everyone is convinced by the study’s findings, with crypto enthusiasts somewhat split on what it means for their beloved currency.
Some lashed out, calling for more regulation and further investigations, while others claimed the report contained nothing new and that talk of the price of bitcoin being manipulated was absurd.
Regardless of where you stand on the matter, because of the sheer amount of money that traded hands during bitcoin’s heyday in late 2017, the mere suggestion of price manipulation has caught a lot of people’s attention.
Now authorities, and investors who lost their money in the crypto bubble, want answers. Let's start with simple ones: What is Tether, and who’s behind it?
What is Tether?
Tether should be no mystery to crypto traders — it’s among the most traded digital coins. But it’s also got somewhat of a reputation, having long been viewed with suspicion because of the lack of transparency surrounding how it operates.
In simple terms, Tether is a digital coin that its creators claim is matched up with the U.S. dollar. This promises to make the coin far less volatile than most other digital currencies. But experts have questioned whether this so-called "stable coin" actually has enough cash reserves on hand to account for its value. There are currently more than 2.5 billion Tether tokens in circulation, meaning the company that issues the coins, Tether Limited, should have at least $2.5 billion in a bank account to secure their value.
“The evidence is statistical, but it's glaring.”
Problems arose last year when experts openly questioned whether the company behind Tether actually had the reserves in place to match the huge number of tokens it was printing. Tether's white paper promised regular audits to show the company holds the necessary funds in reserve, but the last complete audit was published in March 2017.
Further complicating matters is the murky relationships between Tether and Bitfinex, the only exchange on which you can directly buy the digital token.
What is Bitfinex?
Bitfinex is a large Hong Kong-based cryptocurrency exchange that in December 2017 became the only place where you can buy Tether. The company's leadership claimed it was a decision meant to appease their banking partners, who were staining under increased demand.
Yet exclusivity isn’t the only thing binding these companies together. Bitfinex also shares much of the same leadership as Tether Limited, including its CEO, chief financial officer, chief strategy officer and general counsel, according to documents revealed in the Paradise Papers.
This incestous relationship is one of the driving concerns around the currency, and was again under intense scrutiny following reports of possible bitcoin price manipulation.
Both companies have denied any wrongdoing: “Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex,” CEO of both companies, JL van der Velde, said in a recent statement.
What is everyone upset about?
According to the researchers from the University of Texas, the company behind Tether issued digital tokens to Bitfinex, which then used those tokens to buy bitcoin. The report argues that these purchases were then carefully timed to buy bitcoin just as it was dropping, then flip them back once the prices shot up again.
This scheme, the study claims, allowed these buyers to artificially inflate Bitcoin's price for their financial gain.
“When prices are falling, the Tether creators can convert their Tether into Bitcoin in a way that pushes Bitcoin up and then sell some Bitcoin back into dollars to replenish Tether reserves as Bitcoin price rises,” the report states.
But it’s not quite that clearcut.
Another study, published last week, generally backed up the findings of the UT research but made one significant distinction: “It is not possible to prop up the price of bitcoin on Bitfinex through Tether — regardless of whether or not these tokens are backed.”
The study’s author, Robert-Jan den Haan, explained to VICE News that Bitfinex simply does not allow its users to buy bitcoin with Tether directly on the exchange. But he pointed out that Tether could be traded on other exchanges, where one can buy bitcoin with it.
“I can say that this is very clear in the runup from $10,000 to $20,000, there was no need for any manipulation.”
Others cautioned against deriving too much from one study, and called for a closer reading of the trends.
“Anyone seriously interested in these issues should read the paper, not as an authoritative last word, but as a plausible account backed by some data,” wrote Aaron Brown, a former Wall Street executive and cryptocurrency expert, at Bloomberg.
Another expert cast further doubt on the idea of price manipulation during the currency’s record-breaking months, attributing the radical jumps to a “madness” that overtook the market.
”I saw droves of new clients coming into the platform as quickly as they can, trying to get into the market,” Mati Greenspan, a market analyst with eToro, told VICE News. “I can say that this is very clear in the runup from $10,000 to $20,000, there was no need for any manipulation.”
Authorities aren’t as certain, however. In December, the Commodity Futures Trading Commission subpoenaed Tether, seeking proof that it is backed by a reserve of U.S. dollars, as it claims. Then, separately, in May the Department of Justice launched a criminal investigation into possible bitcoin price manipulation. Neither organization has said when the investigations will conclude.
“The evidence is statistical, but it's glaring,” David Gerard, author of the ‘Attack of the 50 Foot Blockchain” told VICE News. “There's definitely a case for the players to answer, and this sort of thing is why the CFTC and Justice Department are on the case.”
Cover image: Bitcoin exchange in Tel Aviv. Alexey Vitvitsky / Sputnik via AP