Bitcoin fell on Wednesday after an academic paper claimed the cryptocurrency's run to $20,000 appeared to be driven by market manipulation.

The alleged manipulation centres around exchange Bitfinex and the cryptocurrency Tether, which it is closely linked to.

The paper claims Bitfinex used Tether to buy bitcoin at times of low demand and prop up the price. Bitfinex denies this.

It's not the first time concerns about Tether have surfaced. Rumours have been circulating that Tether, a crypto pegged to the dollar, does not have the currency reserves to back it up. The company behind Tether strongly denies allegations.



LONDON — Cryptocurrency Tether is back in the headlines for all the wrong reasons.

Academics at the University of Texas published a paper on Wednesday alleging that Tether was last year used to manipulate the price of bitcoin, propping up its run to $20,000 last December.

Concerns have been swirling in the cryptocurrency market for months about Tether, a cryptocurrency issued by Tether Limited. The price of bitcoin dived in February after news that Bitfinex and Tether had been subpoenaed by the US Commodity Futures Trading Commission (CFTC).

Tether is meant to be backed one-for-one by the US dollar. It plays a central role in the operation of many leading cryptocurrency exchanges, including Bitfinex, but critics suggest it doesn't have the dollar reserves it claims. Bitfinex denies this. If this theory is true, it has the potential to crash the price of bitcoin and potentially hobble the operations of many exchanges.

Here's what you need to know:

What is Tether?

The Tether symbol. Tether Tether is a cryptocurrency that's meant to be backed one-for-one by the US dollar. The idea is to have the price stability of the dollar combined with the operational ability of a cryptocurrency. It's what people in the crypto world call a "stable coin."

The cryptocurrency was created in 2015, originally called Realcoin, and there is $2 billion-worth of so-called USDT in circulation today, according to industry data source CoinMarketCap.com. It was hit by a $31 million hack last November.

Who is behind it?

Tether tokens are issued by Tether Limited, a company based in the British Virgin Islands according to the New York Times. Tether's website says it is incorporated in Hong Kong, with offices in the US.

The company has many of the same management team as Bitfinex, the Hong Kong-based cryptocurrency exchange that is one of the biggest in the world. Jan Ludovicus van der Velde is CEO of both Bitfinex and Tether, and Philip Potter is chief strategy officer for both businesses, for example.

Who uses Tether?

"Anybody who's trading on some of the major exchanges [holds Tethers]," Mati Greenspan, a market analyst with eToro, told Business Insider. "What exchanges like Bitfinex do is, rather than having a client's balance held in dollars, they hold them in USDT. So if somebody's got their money on an exchange such as Bitfinex and they don't have any current open positions, they're actually probably in Tether."

Many cryptocurrency exchanges have difficulty working with traditional banks, who are wary of working with crypto businesses. Tether offers a stable alternative, offering the low volatility of the dollar to both exchanges and users.

An industry source who didn't want to be quoted told BI: "Tether is used by crypto-to-crypto exchanges as it allows them to price crypto assets in USD without having to maintain/own USD-denominated bank accounts – this is of particular interest to many platforms due to the difficulties involved in maintaining banking relationships in the crypto space."

Tether's website says that it "allows you to store, send and receive digital tokens person-to-person, globally, instantly, and securely for a fraction of the cost of alternatives." Holding client funds as Tether means exchanges can cut down on transaction costs until a client wants to redeem their funds as dollars. Then, Tether can be exchanged for those dollars.

Traders also use USDT to lock in returns during times of volatility and also transfer funds from one platform to another.

Why are people worried?

The company that controls and issues Tether is meant to hold US dollar reserves to back up all of the Tethers that have been issued — a little like the Federal Reserve backstops dollars with gold. In theory, Tether holders can sell one USDT back to Tether Limited for $1.

Bitfinex and Tether share management teams. REUTERS/Dado Ruvic/Illustration But fears have emerged in the cryptocurrency community that Tether Limited doesn't hold sufficient currency reserves to back all the Tethers in circulation.

"The claim is — and the claim has been growing lately — that they're not holding those reserves," Greenspan told BI. "They haven't been incredibly transparent about where they're holding them and how much they're holding in different places."

The New York Times reported in November: "One persistent online critic, going by the screen name Bitfinex’ed, has written several very detailed essays on Medium arguing that Bitfinex appears to be creating Tether coins out of thin air and then using them to buy Bitcoin and push the price up."

A recent anonymous statistical analysis of Tether published online and circulated in the crypto community made the same claim, saying: "It is highly unlikely that Tether is growing through any organic business process, rather that they are printing in response to market conditions."

The report claims that the printing of Tethers tends to coincide with a dip in the price of bitcoin, suggesting it may be being used to buy up cheap bitcoin.

"Tether printing moves the market appreciably; 48.8% of BTC’s price rise in the period studied occurred in the two-hour periods following the arrival of 91 different Tether grants to the Bitfinex wallet," the analysis said.

The University of Texas at Austin's paper supports this conclusion. The two academics who wrote it looked at Tether activity over the last two years and concluded that the price patterns are "most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices," and bitcoin specifically.

$850 million worth of new Tethers were printed in January alone and many market participants are worried about the pace at which new Tethers are being minted without proper documentation showing their backing.

Tether published an accounting document last September meant to verify its holdings but a lawyer told the New York Times that the phrasing of the document "did not prove that the Tether coins are backed by dollars."

Accountants Friedman LLP prepared that document and were auditing Tether's books fully, but the relationship "dissolved" in January.

What could it mean for crypto markets?

If there is a problem with Tether, it could have wider knock-on effects for the cryptocurrency market as a whole due to its central role in many exchanges.

Tether's website. Screenshot/Tether

"The issue is that the volumes against Tether have been growing lately," Greenspan said. "If there aren't sufficient reserves in US dollars, then the price of Tether should not then be pegged to the US dollar and it'll just be decided by the market."

The fear is that a collapse in the price of Tether could also bring about a collapse in the price of bitcoin and other crypto assets that people have been trading with USDT.

If Tether becomes untethered from the dollar then it will also cause problems for exchanges that use it as a proxy for client funds. This could potentially create liquidity issues and, in a worst-case scenario, force them to seek extra capital. Wired wrote this week: "If traders lose faith in tether, they could end up triggering the crypto version of a bank run."

What does the company behind it say?

Tether Limited has strongly denied all the accusations against it, insisting that it has the dollar reserves to back up all Tethers in circulation and saying it is using its funds properly.

The company said in a statement in December that it is aware of "questions and doubts throughout the community" but said it "cannot disclose much about ongoing investigations," related to the hack in November.

It said that accusations it does not hold dollars to back up its cryptocurrency are "uninformed and baseless" but admitted that it "cannot create or redeem tether for any U.S.-based customers at this time." The company has hired a law firm to take legal action against the person behind the anonymous Bitfinex'ed Twitter account.

Tether told Business Insider in an emailed response to questions about its audit:

"We confirm that the relationship with Friedman is dissolved. Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame. As Tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success.

"We remain committed to the process and, as we’ve consistently done, we will continue to provide material updates at the appropriate times."

The company told Bloomberg in an email responding to the CFTC subpoena: "We routinely receive legal process from law enforcement agents and regulators conducting investigations. It is our policy not to comment on any such requests."

CEO JL van der Velde said in a statement addressing the University of Texas at Austin paper: "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."