$2.5 Billion: Tether Used to Manipulate Bitcoin’s Price Last Year, Study Suggests

  • A study conducted by University of Texas professor John Griffin suggests Tether (USDT) has been used to manipulate bitcoin's price last year.
  • Analyzed data includes mid-December, when the flagship cryptocurrency surged to nearly $20,000.
  • Tether and Bitfinex have been embroiled in controversy over the stablecoin's issuance.

A study recently published by University of Texas professor John Griffin and co-author Amin Shams suggests that Tether (USDT), a crypto supposedly backed by fiat currency 1:1, has been used to manipulate bitcoin’s price last year.

According to the paper Griffin and Shams authored, titled “Is Bitcoin Really Un-Tethered?”, the stablecoin was used to create support areas for the flagship cryptocurrency, effectively ensuring its price didn’t drop, and that other traders saw buy signals in specific ranges.

As Bloomberg reports, Tether tokens started trading in 2015 and were pitched as a stable alternative to bitcoin’s volatility. Notably USDTs are issued by Tether, a company connected to popular cryptocurrency exchange Bitfinex, which lost banking relationships last year, but continued to operate.

After Bitfinex lost banking services, several community members started questioning whether Tethers were indeed being backed by actual dollar reserves, to the point the US Commodity Futures Trading Commission (CFTC) subpoenaed both companies late last year, in an attempt to find out whether said reserves exist.

In their study, Griffin and Shams looked at how the 2.5 billion Tethers in existence flowed through the crypto markets. They found these were created in large chunks, often of 200 million or more, and are then moved to crypto exchange Bitfinex.

Per the researchers, these were then used to buy bitcoin “in a coordinated way that drives the price,” specifically when BTC’s price started dropping. Griffin said:

“I’ve looked at a lot of markets. If there’s fraud or manipulation in a market it can leave tracks in the data. The tracks in the data here are very consistent with a manipulation hypothesis.”

John Griffin

The paper details that when the flagship cryptocurrency’s price fell, purchases with Tether tended to increase, which then reversed the decline. When bitcoin rose, it adds, the opposite wasn’t seen. This, to Griffin, is “suggestive of Tether being used to protect bitcoin prices during downturns.”

Analyzed data includes last year’s price surge that saw most cryptocurrencies hit a new all-time high, with bitcoin coming close to the $20,000 mark in mid-December, according to CryptoCompare data. At press time, the flagship cryptocurrency is trading at $6,458 after falling 4.55 percent in the last 24-hour period.

Potential BTC Price Manipulation

Griffin’s study identified 87 of the largest purchases from March 2017 to March 2018, and noted that in these cases USDTs had been issued three days before said purchases occurred. Per the report, these purchases occurred one hour after bitcoin’s price started declining.

These examples, as Bloomberg notes, account for less than 1 percent of the examined period, while amounting to 50 percent of the flagship cryptocurrency’s compounded returns last year. Per Griffin, a noticeable trend they picked up noted that when bitcoin traded near price thresholds defined in $500 increments, purchases with Tether “strongly increase.”

Per Griffin, this gives other investors the impression there’s a price floor they can place their buy orders at, which subsequently drives up the price. The paper’s authors purportedly ran 10,000 different simulations, which showed “this behavior never occurs randomly.”

The researchers added:

“If it was random behavior you wouldn’t see it cluster around the thresholds. It indicates it’s a conscious strategy to provide price support.”

John Griffin, Amin Shams

It’s worth noting that both Bitfinex and Tether share a management team that includes the cryptocurrency exchange’s chief executive officer, JL van der Velde. According to Bloomberg, he said in an emailed statement:

“Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.”

JL van der Velde

Despite the CEO’s words, various community members and regulators remain skeptical. As CryptoGlobe covered, the US Department of Justice (DOJ) has recently launched a criminal probe into potential bitcoin price manipulation, in a move that’s seen as the culmination of US’ scrutiny into cryptocurrency markets.

What’s going on with Bitfinex and Tether is still unclear. Unconfirmed reports have suggested the company saw Polish authorities seize $380 million from the exchange. Aside from the Tether situation, Bitfinex has been embroiled in controversy as it recently asked customers for tax data, which can be shared with local tax authorities. Earlier this month, the company suffered outages amid a cyber attack.

Study: How Much Money Does a Crypto Company Need?

Written by: Gregory S Mathew

In this article, we’ll try to decipher on average how much capital does a blockchain/crypto company raise and how long it lasts, before having to raise funds again.

We’ll be looking into two kinds of startups that

  1.  raised seed funding, followed by other Venture funding rounds
  2. that raised funds purely through token sales such as an ICO, STO, or IEO.

All data used in this article is sourced from InWara’s Market Intelligence Platform, unless explicitly[1] stated otherwise.

The Era of Blockchain and Cryptocurrency Startups

Blockchain and crypto startups are attracting immense investor attention on a global scale, within a handful of years, these startups have raised a whopping $46 billion to date. With such a resounding success, it’s easy to get caught up in exuberant stories of the best startups.

But despite the technical advantage these startups tout, most of them fail just like any startup. Forbes claims one of the major reasons for failure could be raising excessive capital too early and running out. Yes, sounds paradoxical, but it makes sense.

Hence, in light of this perplexing paradox, let’s try and decipher how much capital does a blockchain/cryptocurrency startup need to survive? By estimating how fast do these startups burn through cash.

The Venture Capital Route

For example, I’ll first consider blockchain and crypto startups that raised capital in Seed Funding. Then estimate, on average, how much was raised, and how long it lasted before having to raise more in new funding rounds like a Series A.

seed funding rounds

The average Funds raised in various funding stages is Seed Funding - $1.94 million, Series A - $8.8 million, and Series B - $24.8 million. On average, these startups waited 16 months between Seed and Series A funding rounds, 25 months between Series A and Series B funding rounds.

So what can we infer from this? For a blockchain and cryptocurrency startup, you’d probably need ~$2 million during your initial stages in Seed Funding to kickstart operations and this should last you ~16 months, before having to raise capital again.

And the same principle can be applied to later funding stages.

Now, what about blockchain-based fundraising? Token sale mechanisms like Initial Coin Offering (ICO) and the latest Initial Exchange Offering (IEO) are what propelled these startups into the limelight in the first place.

As much as 65% of the total funds raised by Blockchain and Crypto startups were through token sale mechanisms like ICOs, STOs, and IEOs.

img 2.png

A dive into the funds raised by these startups over the past few years clearly shows the dominance of blockchain-based fundraising over traditional Venture Capital. Hence, this study wouldn’t be complete without touching on these methods as well.

The Token Sale Route

It’s important to note that, in 2018, several thousand ICO projects were launched and several billion raised. While some of them like EOS were a resounding success having raised $billions, most of them raised little to no money.

Funds raised by ICO startups

An analysis of the funds raised by blockchain and crypto startups reveals that as much as 47% of the startups raised less than $5 million. And less than 5% raised more than $50 million. This suggests that predominantly blockchain-based fundraising is being leveraged to raise relatively smaller amounts of funds.

Shift From ICOs to IEOs

But in H1 2019, there was a shift from ICOs to Initial Exchange Offerings (IEOs). A method of fundraising that has become the go-to method of raising capital. IEOs are so successful right now that some token sales, like that of BitTorrent’s, concluded within a matter of minutes and raised several millions.

This success has prompted previously launched blockchain and cryptocurrency projects that conducted ICOs to launch their own IEO, as a way to raise fresh capital to fund their operations.

Note: This data is based on the several dozen Startups that have conducted both an ICO and an IEONote: This data is based on the several dozen Startups that have conducted both an ICO and an IEO

On average, blockchain and crypto startups raised $11.8 million during their ICO and $8 million during their IEO. But what’s important to note here is the short time frame between the token sales. Within just 3 months, on average, several dozen blockchain startups launched another token sale in the form of an Initial Exchange Offering.

Now, this might seem shocking at first but makes some sense when you realize that, unlike traditional venture capital, the sole purpose of launching a token offering is not just to raise funds but also to build a community, for marketing, to distribute tokens, etc.

That’s not to say there aren’t some projects that took advantage of the incredible buzz around IEOs to raise capital. Although they’ve raised plenty during their ICO.

Ethereum Treasuries

There’s one final way to gauge how much capital ICO projects need. We can analyze their ETH wallet balances. This gives us a fairly accurate measure of how much funds - were raised during their ICO, have been utilized so far, and over what period of time.

ethereum treasuriesNote: This data is based on a sample size of ~100 ICO projects From May 2018 to April of 2019, on average, as much as 3,700 ETH was withdrawn from public ICO treasuries. That’s an incredibly small amount. So what’s the deal here? Our deeper analysis of the data reveals that, some ICOs have seen an influx of ETH into their wallets, since their ICOs.

Another, more speculative, reasoning would be that these ICO projects are hodling their ETH for the next bull-run. When it’s more likely to be more profitable for them to cash out.