For this week’s piece, we’re going to keep things a bit more on the brief side, everyone. Earlier in the week, an academic report went public forwarding proof that the price of bitcoin (BTC) had been strongly manipulated during the 2017 bull run and run up to Christmas. The author, John Griffin, has a background in looking for fraud in the financial markets and believes that bitcoin underwent price manipulation in 2017. The paper, titled “Is Bitcoin Really Un-Tethered,” can be accessed here for those interested in the findings. In short, the story was pretty simple. Griffin, and his graduate assistant Amin Shams, noted the high likelihood (and veritable money trail) that Bitfinex had been using Tether (USDT) to artificially manipulate and inflate the price of bitcoin, along with other cryptocurrencies, during 2017.
Since the release of the “Paradise Papers,” which proved what some had already been skeptical of (here’s to you, @Bitfinex’ed), we know that Bitfinex and Tether used Appleby, the offshore law firm responsible for aiding companies conducting business in other locations assisted Potter and Devasini to set up Tether in the British Virgin Islands in 2014. Bitfinex’ed was already critical of the business practices of Bitfinex, one of the largest cryptocurrency exchanges in the markets, and this most recent report by Griffin and Shams from the University of Texas at Austin fully backs up his criticisms.
So we know that the price of bitcoin was being artificially inflated and manipulated. Like Bitfinex’ed had already been saying, the exchange was really “printing” more USDT whenever they felt like it or it fit their needs. Initially, the concept behind USDT was to have a stablecoin available for investors and traders to use to park gains after liquidating standard cryptocurrencies. However, as time went on, many began to become suspicious as more USDT tokens were printed, even though there may not have been the cash to back it up. The thing is, as long as cryptocurrency prices—especially bitcoin—were continuing to rise from the market manipulation, most people didn’t want to say anything or pursue it. After all, a rising tide raises all ships, right?
In theory, that may be correct. But what about when the tide isn’t actually rising? What if you’re actually in a pool with a hole and instead of trying to fix the leak, someone hooked up a hose that was releasing water into the pool faster than it was leaking out. I think we all see the problem here, and that’s that this model isn’t sustainable.
Even putting questions of business ethics aside for a while, there just isn’t any way that the Bitfinex-Tether debacle can continue to affect the markets without more investors getting hurt in the long run. Sure, day-traders may do okay on the volatility and near assurance that there would in fact be a floor at some point, but does that actually help the cryptocurrency space at all if the majority of it isn’t real? Is there any benefit from artificially injecting more supposedly fiat-backed Tether tokens into the market? I don’t think there is. According to Griffin’s paper:
Overall, our 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 truly free. More generally, our finds 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.
In other words, operating in a manipulated market can mean that investors put a lot of very real capital in the wrong places not because they were stupid, but because they were naively operating with the understanding that the markets were, to some extent at least, open and free.
Unfortunately, I think for the majority of us in the cryptocurrency space, this report from the Griffin and Shams wasn’t so much a revelation as it was a confirmation. When you’re trading in the markets and see the order books, see massive buy and sell walls quickly vanish and reappear again, most people catch on quickly. We’ve all seen ‘whales’ in the markets before, and most of us have probably seen price fluctuation between very specific price points as those with more cryptocurrencies use their advantage to accumulate more coins before letting the markets open up. Now that institution-levels of market manipulation have essentially been confirmed, there’s really only one question left:
Was anyone surprised?
I certainly wasn’t.