Tether, a cryptocurrency pegged to U.S. dollars, is manipulating Bitcoin and other cryptocurrency prices during the recent boom, researchers say. John Griffin and Amin Shams, of the College of Texas at Austin’s Division of Finance, published this research. There are lots of speculations over the past 6 months that tether really is not supported by anything or if it is supported by anything it is partially reserved rather than 100% supported by the US dollar.
John Griffin and Amin Shams used algorithms to analyze the blockchain data, and found that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Their analysis centered on examining potential manipulation of Bitcoin and other major cryptocurrencies. They also examined whether the growth of a pegged cryptocurrency, Tether, is primarily driven by investor demand, or is supplied to investors as a scheme to profit from pushing cryptocurrency prices up.
Researchers said that
“ By mapping the blockchains of Bitcoin and Tether, we are able to establish that entities associated with the Bitfinex exchange use Tether to purchase Bitcoin when prices are falling. Such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention. These effects are present only after negative returns and periods following the printing of Tether”
According to them, less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies. The flow clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests incomplete Tether backing before month-ends. These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.
They first collected and analyzed both the Tether and Bitcoin blockchain data through a series of algorithms. After that they implemented that data to reduce the complexity of analyzing the blockchain. In particular, because of the semi-transparent nature of the transaction history recorded on the blockchain, they were able to use variants of methods developed in computer science [Meiklejohn et al. (2013) and Ron and Shamir (2013)] to cluster groups of related Bitcoin wallets.
In short, their findings provide substantial support for the view that price manipulation may be behind substantial distortive effects in cryptocurrencies. These findings suggest that external capital market surveillance and monitoring may be necessary to obtain a market that is truly free. Their findings also support the historical narrative that dubious activities are not just a by-product of price appreciation, but can substantially contribute to price distortions and capital misallocation.