Bitcoin's record-high 2017 price was result of market manipulation, claims study

A cryptocurrency mining computer is seen in front of Bitcoin logo. A university research papers says there is evidence of manipulation of cryptocurrencies. Reuters

"Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices", Griffin and Shams wrote.

The report suggests that popular exchange Bitfinex, which created and sold Tether, may have used it to buy up Bitcoin and increase demand, thereby boosting its price.

Specifically Amin Shams and Professor John Griffin's 66-page paper looks at the relationship between Bitcoin and Tether, a "stablecoin" supposedly backed by and pegged to the U.S. dollar. If it transpires that last year's record prices were the result of manipulation then without tether's support, the prospect of bitcoin hitting another all-time high is remote.

However, the currency may have had another shady objective; large amounts of Tether were also used buy Bitcoin, which propped up its value, the researchers claim.

Bitcoin and other virtual currencies fell yesterday. Several exchanges have been using Tether as a way to quickly facilitate fund transfers, replacing the need to depend on banks.

Bitfinex's CEO told Business Insider: "Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation". Each one is worth $1 and is (supposedly) backed by physical dollar holdings, meaning users can convert their real-world cash into Tether and easily spend it on digital currencies.

According to the researchers at the University of Texas, the cryptocurrency Tether was allegedly used by the Bitfinex exchange to support the price. They found that half of the increase in Bitcoin's price in 2017 could be traced to the hours immediately after Tether flowed to a handful of other exchanges, generally when the price was declining.

Other experts have vouched for the credibility of the paper, with Sarah Meiklejohn of University College London saying the research "seems sound" after a review. He is most notably recognized for a 2016 paper that found manipulation in a financial contract known as VIX which was tied to flux in financial markets which were later confirmed by a whistleblower.

The new paper is not the first academic work to identify manipulation in the virtual currency markets. Such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention. A paper published past year by a team of Israeli and American researchers said much of bitcoin's big price increase in 2013 was caused by a campaign of price manipulation at what was then the biggest exchange, Mt Gox.

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