Tether Manipulation and the Peak of Bitcoin

Un-Tethering the Biggest Crypto Coin

“Tether seems to be used both to stabilize and manipulate Bitcoin prices,” finance professor John Griffin and co-author Amin Shams wrote in a paper released in June.

Griffin and Shams presented an interesting manipulation hypothesis that works like this: Tethers are created by the parent company Tether Ltd., often in large chunks such as 200 million. Almost all new coins then move to Bitfinex, he said. When Bitcoin prices drop soon after the issuance, Tethers at Bitfinex and other exchanges are used to buy Bitcoin “in a coordinated way that drives the price,” Griffin said in an interview.

Furthermore, when Bitcoin’s price fell, purchases with Tether tended to increase, helping to reverse the decline. But during times when Bitcoin rose, Griffin said he didn’t see the reverse occur. That’s “suggestive of Tether being used to protect Bitcoin prices during downturns,” he wrote.

Looking deeper, at Kraken, the third-most-common trade during the period examined was for 13,076.389 Tethers. (Behind 75 and 1,000.) Many other orders go out to five decimal places, numbers like 34.08652. Abrantes-Metz and Williams suspect that such numbers could be signals to cheaters’ automated trading programs. One possible explanation: The software would look for orders with a unique size, and trade against that. Taking both sides of a transaction is known as wash trading, something banned in regulated markets like stocks because it can give a false impression of market supply and demand. Kraken isn’t similarly regulated by the government.

In any case, the U.S. government is paying a lot of attention to the overall $248 billion crypto market. The Justice Department is conducting a criminal probe into whether traders are manipulating the price of Bitcoin and other digital currencies, with techniques including wash trades, Bloomberg revealed last month.

And the U.S. Commodity Futures Trading Commission has been examining Tether. In December, the agency subpoenaed Tether and Bitfinex, seeking proof that Tether is backed by a reserve of U.S. dollars, Bloomberg reported in January. Neither have been accused of wrongdoing. In June, Tether released a report in which Freeh Sporkin & Sullivan LLP, a law firm co-founded by former FBI director Louis Freeh, said Tether had $2.55 billion deposited in banks as of June 1. The analysis wasn’t an official audit, however.

This website is for information and illustrative purposes only. It is not, and should not be regarded as "investment advice" or as a "recommendation" regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. See Disclaimer.