TL;DR: “Is Bitcoin Really Un-Tethered?” is the working paper recently accepted by The Journal of Finance from John M. Griffin (University of Texas at Austin) and Amin Shams (Ohio State University). The 119-page updated document argues much of the price runup of bitcoin in late 2017 was a combination of a lone investor, the exchange Bitfinex, and favored stablecoin tether (USDT) in inorganic cahoots. Much of the cryptocurrency ecosystem hotly disputed Griffin and Shams claims, blaming legacy finance outlets such as The Wall Street Journal and Bloomberg for spreading fear, uncertainty, and doubt (FUD) in back-to-back appraisals of the study.

Is Bitcoin Really Un-Tethered?

“By mapping the blockchains of Bitcoin and Tether, we are able to establish that one large player on Bitfinex uses Tether to purchase large amounts of Bitcoin when prices are falling and following the printing of Tether,” Griffin and Shams conclude in a research study first set for public review in summer of 2018 and recently updated late last month for final publication.

“Such price supporting activities are successful,” they insist, “as Bitcoin prices rise following the periods of intervention. Indeed, even 1% of the times with extreme exchange of Tether for Bitcoin have substantial aggregate price effects. The buying of Bitcoin with Tether also occurs more aggressively right below salient round-number price thresholds where the price support might be most effective. Negative [end of month] price pressure on Bitcoin in months with large Tether issuance indicates a month-end need for dollar reserves for Tether, consistent with partial reserve backing.”

Griffin and Shams suggest their hypothesis of how price manipulation causes “substantial distortive effects in cryptocurrencies” is heavily documented through the paper, and that prices in crypto markets go beyond traditional supply and demand calculations and news headlines. “More broadly, these findings also suggest that innovative technologies designed to bypass traditional banking systems have not eliminated the need for external surveillance, monitoring, and a regulatory framework as many in the cryptocurrency space had believed.”

At Least Two Bubbles Burst

It’s that last part especially wrangling cryptocurrency enthusiasts. Tether and Bitfinex working in concert is hardly revelatory, as the New York Attorney General has attempted to show through a recent and on-going court battle with the pair. But the idea that prices in the broader space, and among its marquee coin especially, reached such vaunted heights by way of one whale investor … really bothered those who rely on the Number Go Up mantra.

A Bitcoin worth considerably more than half a trillion dollars by market capitalization back in late 2017 is now official legend, one nearly all who “hodl” the coin cling to with great fervor as something surely around the corner (“last chance to buy at $10,000” is another mantra). That half of that staggering run was manipulated, out-and-out cotton candy puffery, is not a welcome notion. And that USDT was a prime culprit, the stablecoin to beat all stablecoins, is also more horrifying news considering how ubiquitous it is among exchanges.

Griffin and Shams do not name the investor/manipulator, but have pinned the onus on Bitfinex and their executive team — the manipulation was so massive, researchers allege, company insiders would have had to know. “If it’s not Bitfinex, it’s somebody they do business with very frequently,” Griffin told The Wall Street Journal. In the same article, an exchange spokesperson slammed Griffin and Shams, insisting, “It is the global rise of digital currency that has driven the market’s demand for tether.”

Extremely Weak Reporting

Bloomberg followed The Journal, summarizing how “Tether rejected the claims, with General Counsel Stuart Hoegner arguing in a statement that the paper is ‘foundationally flawed’ because it is based on an insufficient data set. The research was probably published to back a ‘parasitic lawsuit,’ the general counsel added.”

Circle founder and CEO Jeremy Allaire was one of the first to come out against The Wall Street Journal reporting, calling it “Extremely weak,” stressing how the legacy outlet seemed “to completely misunderstand how stablecoins work and how $’s flow into and across exchanges. Stablecoin issuers,” Allaire demanded, “respond to inflow and outflow demands from crypto traders and investors. So, for example, last week when there was a BTC rally on China news, we saw large inflows into USDC which led to a ‘single address’ creating a lot of USDC and then flowing to exchanges. Exchanges use omni-bus wallets that pool all customer balances and transactions on and off the exchange. So an analysis that shows that ‘a single wallet’ was involved in flows from Bitfinex to other exchanges is meaningless. All it shows is that traders were trading.”

Moreover, Allaire pointed out, back during the price runs of 2017 “there was demand for buying BTC and a massive alt coin rally. The majority of that demand came from Asia and China, and since there were no CNY ramps into BTC, everyone went to offshore USDT processors. These processors would then generate large prints of USDT. The only thing this supposed analysis shows is that Asia traders demanded fiat to buy BTC and other alt coins on exchanges around the world. We all know that the USDT prints had an origin in Bitfinex managed treasury wallets. Blockchain data actually only shows when new fiat tokens came into existence and how they flow through trading markets. The analysis is useless unless you can also see the payment processing and transaction banking settlement flows of Tether, which is not public.”

Allaire’s take was representative of most pushback against Griffin and Shams. He and others defending the 2017 rally slammed both The Wall Street Journal and Bloomberg for turning toward clickbait headlines in lieu of really understanding how markets in crypto operate. “The entire premise seems to misunderstand how markets and stablecoins work,” Bruce Fenton, CEO of Atlantic Financial commented, backing up Allaire. “It’s bad science: 119 pages of pseudo economic techno babble based not on objective research but on a bad premise that the author really wanted to be true.”

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