Bitcoin making a comeback, but not because of Facebook

Bitcoin is in the midst of another bull run. The price of the digital currency reached over $11,000 on the weekend. As of press time, it is around $10,800, up 170% for the year.

Analysts like to come up with all kinds of reasons why the price of bitcoin is going sky high. The latest speculation is that the current price rise is linked to the announcement of Facebook's cryptocurrency Libra, which they say will create mass awareness and act as a gateway to bitcoin adoption.

What these analysts fail to mention is how easy the price of bitcoin is to manipulate. Bitcoin is thinly traded, so all it takes is one large trader, known as a "whale," to put up a large sell order to cause the price to go down. We see this happen all of the time when whales try to burn short sellers on Bitmex, a bitcoin derivatives exchange. Conversely, a large buy order can push the price up, when needed.

But there is another reason the price of bitcoin is going up now — and it has nothing to do with Facebook. The current run up corresponds with the New York Attorney General's investigation into crypto exchange Bitfinex and its affiliate Tether, which produces a stablecoin of the same name (tether).

Tether, which provides stability in volatile crypto markets, works like an I.O.U. One tether is worth $1 dollar, and tethers are supposed to be backed by a full reserve of U.S. dollars in some bank accounts somewhere. You can use tethers, of course, to buy bitcoin.

The NYAG began investigating Bitfinex late last year after it found that Bitfinex had a shortfall of $850 million, due to an issue with its third-party payment processor. In February, the NYAG learned that Bitfinex was contemplating a transaction that would allow Bitfinex to draw upon Tether's cash reserves on an as-needed basis. This led to the NYAG issuing a lawsuit against Bitfinex in April, to try to get Bitfinex to stop tapping into Tether's reserves.

At that time, there were about $2 billion worth of tethers on the market. Since then, Tether has gone on a frenzied issuance spree. In the month of May, the stablecoin company pumped out $1 billion worth of tethers into the market. And this month, it is on track for another $1 billion. Currently, there are roughly $3.8 billion worth of tethers sloshing around in the bitcoin markets.

Whether this money is backed by real dollars is anyone's guess. Bitfinex has never submitted to a third-party audit. In April, Bitfinex’s general counsel admitted in court documents that tethers were only 74% backed, so we know that at least one quarter of the funds are now missing.

Investors and analysts seem to forget Bitcoin's wild ride of 2017, when the crypto shot up to nearly $20,000 and then dropped to $3,000 the following year. The bull run of 2017 also corresponded with an increased issuance in tether.

Anyone investing in bitcoin should understand the issues surrounding Bitfinex and Tether. If authorities were to step in and shut down Tether, that could have a devastating impact on the bitcoin market.

