Addressing the “Is Bitcoin Really Un-Tethered?” Study

A 66 page study is trying to assert that Bitcoin’s 2017 rise was the result of price manipulation using Tether… but the report is narrow and likely not telling the full story. We address the report and present counter arguments that help paint a full picture of what is likely actually happening.[1][2]

NOTE: I’m not saying the report is wrong, I’m saying it isn’t telling the full story in my opinion. In short, the paper is noting how Tether was used to support the price of crypto (that was and is still true), but ignoring the fact that it is hard to deal in dollars on crypto exchanges and that big players commonly dump crypto on the exchanges to force the price down… thus prices need support (or the price would likely be unnaturally low)! See our page on the subject of “is crypto manipulated” (our answer is yes in my opinion, but it is more nuanced than this study suggests).

This paper investigates whether Tether, a digital currency pegged to U.S. dollars, influences Bitcoin and other cryptocurrency prices during the recent boom. Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. 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.

Is Bitcoin Really Un-Tethered? By John M. Griffin and Amin Shams

The Report and What it is Leaving Out

Here is what the report concludes [paraphrasing]:

  1. Tether was used to prop up (stabilze) Bitcoin as it fell in 2017.
  2. Tether was used to pump Bitcoin up as it rose in 2017.
  3. Tether might not be backed in a 1:1 ratio to dollars as claimed by Tether.
  4. Therefore, the majority of Bitcoin’s upward price action was the result of manipulation using Tether.

Here is what I would suggest the report is leaving out:

  1. There is no data that shows that Tether is not backed in a 1:1 ratio. Thus we should assume Tether is what it says and that the Tether token is acting as a stand-in for a digital dollar until if and when evidence exists to the contrary. The report spends a lot of time hinting at the idea that Tether isn’t legitimate, but that is a judgement call, their data did not actually show this.
  2. Bitcoin’s downward price action in 2017, and I’d argue its downward price action since the news of Bitcoin futures trading starting broke, was at best the result of essentially the same manipulation tactics used to push the price up. The only differences is the “bears” buy over the counter and then dump crypto on the markets, where the “bulls” convert dollars to Tether (and accumulate Tether) to support the price on exchanges that don’t use dollars. Since both sides have to buy and sell, both actually end up using Tether! THE REPORT IS LITERALLY MISSING HALF THE PUZZLE HERE (it almost suggests the selling was natural, but the buying was manipulation… that is what I am calling “narrow”)!
  3. It is arguably easier to flood the market with crypto than it is to flood it with cash, because you can go to a broker and buy massive amounts of crypto over the counter for dollars and then flood the market with the push of a button (or you could have accumulated it cheap and early, or you could mine it). Meanwhile you can only lift the price of crypto on the exchanges with dollars or a dollar substitute or via crypto trading pairs (like BTC/ETH). Many exchanges don’t trade in dollars, thus YOU MUST USE TETHER OR ANOTHER STABLE COIN LIKE TUSD. Dollars have always costed a dollar, they were never cheap. Assuming Tether is legit, you could argue the bull side takes more risk. NOTE: How is it profitable to dump crypto on the market? The answer, short positions (for example via futures contracts) and to ensure accumulation at lower prices.
  4. Bitfinex is one of the most important exchanges in terms of crypto prices… they only deal in Tether. Further, other key exchanges like Bittrex only deal in Tether (or did in 2017). So again, one MUST use Tether to support the price of Bitcoin – PERIOD. That means even a white-hat and by the book big player is going to have to utilize Tether to support the price of Bitcoin and protect their investment… against those who are trying to push the market down, manipulating the price, constantly selling for… Tether (because, again, on many exchanges dollars can’t be used).
  5. Although pure demand likely hasn’t driven upward price momentum any more than pure fear has driven sell offs, there is also a lot of natural supply and demand that happens on the exchanges via dollars and Tether. A lot of what happens in crypto trading is technical, so some things that look like a pump or dump or spoof is bots and technical traders all reacting at once and using a mix of limit and market orders.
  6. Thus, all the report is really saying is, “the data shows people used dollars and the dollar substitute Tether to defend and move the price of Bitcoin.”

In summary, while I find the report insightful, well researched, and even over my head at times (I get the abstract and introduction, I can’t deal with the maths)… the researchers are missing a big bit part of the actual dynamic of the crypto space.

I agree crypto is a bubble, and I agree it was inflated with the help of Tethers, but when you add to that points like 1. of course people injected Tether at the lows (duh); what do you expect big players to buy high or not protect their investment, 2. Tether should assumed to be legit if there is no proof it is not, 3. there are equal and opposite forces who dumps the market (why not research that, why not see who helped popped the bubble), etc. it starts to poke major holes in the whole Tether theory and starts making it sound a bit like FUD.

I won’t say there is ever a good time to spread the Tether theory, and I certainly don’t think there is ever a bad time to try to dig up dirt and research things (or present that research), but we should note that these theories seem to come up when Bitcoin is in the middle of a harsh correction.

To spread bad news that scares people in the middle of a harsh correction, well that is itself in a grey area. I’m sure the timing of this paper was incidental, but… well, I guess we have to agree that just because something looks a certain way, doesn’t mean that is the full story. 😉

ON THE TETHER CONSPIRACY: Whenever the price of crypto drops we start hearing Tether conspiracy theories. One might even say that we start hearing a lot of “FUD.” If the media is reporting FUD and spreading Tether conspiracy theories, while some players are dumping massive amounts of crypto via large orders they don’t intend to have filled, all while some players are holding futures contracts short… aren’t we perhaps looking in the wrong place a bit for manipulation, or at least looking with too narrow a lens. When we focus on the idea that the only thing that happened in 2017 was “fake Tether was used to pump Bitcoin which otherwise wouldn’t be doing well,” and ignore the shady as heck way the bubble popped as soon as futures trading started, I really feel like we are missing the big picture.

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Citations

  1. Much of bitcoin’s 2017 boom was market manipulation, research says. CNBC.com.
  2. Is Bitcoin Really Un-Tethered? SSRN.com.


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