Recent work has exposed problems in the relationship between cryptocurrency price data and the models that have attempted to track its price movements and assess risk.
The work from the University of Sussex Professor of Finance (Accounting and Finance) Carol Alexander and PhD student Michael Dakos has also exposed further information regarding the much-discussed 'Tether premium' on the price of Bitcoin. Especially, it exposes a so-called 'decoupling' in price relationships between the high-volume BitFinex bitcoin exchange and other well-established markets at two distinct points in the last two years.
Crypto Pricing Data Still Leaves Much to be Desired
Their recent paper, 'A Critical Investigation of Cryptocurrency Data and Analysis' (published in the journal Quantitative Finance) has thrown up a slew of problems that call into question past analysis of cryptocurrency pricing, and attempts to model the markets for Bitcoin et al.
For followers of the politics and legalities of crypto, however, something else revealed by the research is equally fascinating. In contrast to the researchers' overarching conclusion that much of the price deviation between cryptocurrency markets before 2018 has now reduced significantly - along with the opportunities for arbitrage between them - they found that markets for BTC and ETH featuring Tether (USDT), or hosted by Bitfinex, remain notable exceptions.
Using data collected from the Bitfinex, Coinbase, Gemini, Kraken and Poloniex exchanges via their APIs, the paper found that the price spreads seen across USDT-using exchanges diverged significantly from the USD/BTC pricing on Coinbase, Kraken and Gemini during the last quarter of the research's sample period - ending July 2019.
They largely attribute this variance to variations in the value USDT itself. This is a long-discussed phenomenon, and not all that surprising considering the almost constant conjecture regarding the deposits backing its peg to the US Dollar and the less-than-transparent management relationship between the two.
That ongoing situation was brought back into focus during April of this year, with revelations regarding part of those deposits in fact being 'lent' to Bitfinex by Tether's management in an agreement secured by illiquid shares in the exchange's parent company, and an ongoing enquiry by New York's Attorney General.
What is even more eyebrow-raising about the findings, however, is that even when correcting for variations in the value of USDT compared to USD, BitFinex's prices have remained anomalous during periods at the end of 2018 and in late spring of this year.
The variation in prices of BTC in Tether and USD across exchanges based on Coinbase's USD/BTC market
"The decoupling of the Bitfinex BTC price (even after tether adjustment)", the paper asserts, "coincides exactly with a significant decline in BTC/USD price levels during the fourth quarter of 2018". It then goes on to say that this, in turn, was an event that occurred very close to the introduction of the USDT/USD pair on BitFinex in November of that year, an event that "effectively ended" the Tether-Dollar parity, a situation compounded by its addition of margin trading and up-to 3.3x leverage on the pair just a month later.
The research continues and expands on the work done by Amun Research in the wake of the New York Attorney General's legal moves to investigate the relationship between Bitfinex, Tether and the Crypto Capital Group. Its work charted the details of the relationship between the three entities, the impact that relationship appears to have had on the Tether reserves and the sturdiness of its Dollar peg - it also noted the first signs of a decoupling between Bitfinex’s BTC prices and the wider market in the immediate aftermath of the NYAG story developments in April of this year.
It notes a premium on the price of Bitcoin on Bitfinex in late April, which it attributes to a rush among users to get their money out of the exchange’s wallets - a procedure much easier to perform in Bitcoin than via fiat withdrawals - evidenced by an on-chain exodus of almost $250 million-worth of BTC and ETH flowing away from Bitfinex address the day developments became public knowledge. It also notes the beginning of a new Tether premium on BTC purchases and other factors implying that crypto traders were looking to move assets away from USDT.
The work of Alexander and Dakos picks up Amun’s baton and traces the price relationships up until July, by which time the differences in price had largely disappeared. While it shies away from outlining a causal relationship, it does note an interesting correlation between the attenuation of that disparity and a massive issuance of Tether seen subsequent to the Bitfinex story developments.
“A second Bitfinex price decoupling occurs in mid-April 2019,” the researchers note, before adding that “Most alarming of all” this coincides with “an immense increase in the supply of tether by more than 1.5 billion tokens between mid-March and late June”. It also adds that this increase in Tether supply correlates with an impressive rise in the price of BTC.
The paper then takes time to note several articles linking Tether to the rise of bitcoin values in 2017, including a paper by John M. Griffin and Amin Shams that finds price movements in 2017 on Bitfinex could not "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.”
The implication here, then, appears to be that March/April Tether issuance facilitated not only a market-pumping escalation in Bitcoin values but served to provide a way for Bitfinex to correct anomalies in its markets caused by its own PR problems and the exodus of funds from its wallets while the investigation into it proceeds in New York.
If such an analysis proves to be true, this would further undermine the value of Tether - as pointed out by the Amun Research work - around 25% of its reserves are in fact secured not by dollars, but by shares in the Bitfinex parent company.
You can read the paper in full here.
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