Bitcoins incredible rise in value in the last 12 months has been down to massive market manipulation, a new study has revealed.
During the 2017 peak, which topped out at almost $20,000 (£15,000) per coin, traders were using a separate cryptocurrency called Tether to manipulate its value.
These actions, rather than real demand from investors, propped up the prices of Bitcoin when it was faltering and resulted in the currency’s meteoric rise.
Bitcoin’s price has now crashed to $6,370 (£4,740) – a four month low – following publication of the study.
In a new paper, titled ‘Is Bitcoin Really Un-Tethered?’, University of Texas finance professor John Griffin, and graduate student Amin Shams, look at how Bitcoin’s price may have been artificially inflated last year.
The team looked at the flow of digital currency entering and leaving ocryptocurrency exchange, Bitfinex.
They spotted several patterns that would suggest someone, or a group, had propped up Bitcoin prices when they’d fallen.
To do this, the scammers purchased Bitcoin using a secondary currency known as Tether.
Tether, created, and sold, by the owners of Bitfinex, is backed by the US dollar.
For every coin of Tether, there is $1 (£0.74) of real money in the bank, making it more stable than alternatives, such as Bitcoin.
This meant it also allowed investors to offload Bitcoin into Tether during wild price swings as a means to avoid substantial losses, according to the Nextweb.
‘Tether seems to be used both to stabilise and manipulate Bitcoin prices,’ finance professor John Griffin and co-author Amin Shams wrote in a paper released this week.
Professor Griffin is an academic with a history of spotting fraud in financial markets.
In their research, the virtual currency experts looked at 87 of the largest purchases of Bitcoin with Tether from March 2017 to March 2018.
Before these purchases, Tether had been issued only a few days before hand and Bitcoin’s price had dropped within an hour.
The end result was a boost to Bitcoin’s price.
These 87 examples represent a tiny proportion of the time period studied (less than one per cent) but the purchases accounted for more than 50 per cent of the currency’s compounded return.
‘There were obviously tremendous price increases last year, and this paper indicates that manipulation played a large part in those price increases,’ Professor Griffin said.
The 66-page paper has no proof against Bitfinex, which is registered in the Caribbean with offices in Asia.
Shortly after the report was released, American regulators subpoenaed the company and the price of Bitcoin dropped by two per cent against the dollar.
Since then, the currency has rallied slightly, and is now only 1.5 per cent below the dollar.
Bitfinex has refuted any wrongdoing.
In a statement obtained by the New York Times, Bitfinex CEO JL van der Velde said: ‘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.’
As well as the damning report, other factors have compounded Bitcoin’s plight.
South Korean digital currency exchange Coinrail said hackers had stolen over $37 million (£27.5 million), or almost a third of the virtual currency it had stored.
The theft at Coinrail is not the first time a digital currency exchange has been broken into. The most famous example was Mt. Gox, which got broken into in 2014.
Thieves were able to steal $480 million (£357 million) in digital currencies. Another exchange, Coincheck, had at least $400 million (£298 million) stolen in digital currency earlier this year.
Earlier this year, legendary investor Warren Bufett, known as the Sage of Omaha for his money-making savvy, predicted the Bitcoin frenzy would end in disaster.
He said: ‘In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.’
After admitting he was unsure about the intricacies of the currency’s operations, he said he would never deal in the virtual currency.
‘We don’t own any, we’re not short any, we’ll never have a position in them,’ he said.
‘I get into enough trouble with things I think I know something about’, he said.
This doesn’t surprise me one bitcoin. A digital currency can be manipulated endlessly because it’s not a physical object. These thing are regularly stolen, the coin exchanges are hacked, and billions of dollars have disappeared in lost hard drives. I’m sure it’s a lot of fun to play with, but it’s no place to store your wealth.
“…the currency’s meteoric rise….”
This is what really pisses me off, because I’m seeing this stupid expression in use more and more. Meteors don’t rise, they FALL, you dumb bastard.
NWO says up is down.
Besides, JR, words are infinitely malleable these days. 😉