The unprecedented surge in the value of Bitcoin in 2020 remains under the scrutiny of experts in the field of cryptocurrency and blockchain. Many researchers find no objective reasons for such a dizzying growth of the most popular digital coin and ask themselves the question: “Is Bitcoin really independent from external manipulations?” The market is full of rumors about possible fraudulent schemes. And the fears of investors, as it turned out, have a real basis.
Is Bitcoin so independent?
University of Texas finance professor John Griffin and his co-author, PhD student Amin Shams, conducted their own investigation of Bitcoin’s behavior in 2020 and found some very interesting patterns. In their opinion, the rise in the value of Bitcoin Last year was driven by the hidden actions of several large players, but not by demand from real investors. “Over the past year, there has been a disproportionate increase in the price of digital currency, and in our article we showed that manipulation on the crypto exchange played an important role in this,” said Dr. Griffin. Moreover, the subsequent fall of Bitcoin is more than half reminiscent of previous loudly bursting financial bubbles, such as the dot-com fiasco in the late 90s, the 2008 financial crisis, and even the railroad bubble in the 1840s. In all these cases, there were facts of price manipulation.
Scientists immediately warned that all their conclusions are based solely on statistical analysis of millions of public records of transactions recorded in public registers.
The report relies on bare numbers only. And there is no “hard” evidence in the form of intercepted correspondence in messengers or copies of documents confirming the facts of cryptocurrency manipulation.
But statistics are unforgiving, and the 66-page report of Professors Griffin and Amin Shams did not go unnoticed by both colleagues and the US Department of Justice.
Scientists accuse Bitfinex of Bitcoin fraud
In their report, the University of Texas scientists conclude that at the end of 2020, one of the largest and most unregulated cryptocurrency exchanges, Bitfinex, was involved in Bitcoin manipulation. With the help of Tether tokens, Bitfinex managed to provoke an artificial pump of Bitcoin.
Tether is a secondary virtual currency created and marketed exclusively by Bitfinex owners. Tether or USDT is a digital currency, the price of which is always equal to the value of the US dollar, and is used for intermediary transactions when trading between different cryptocurrencies.
George Griffin and Amin Shams argue that December litecoin prices were artificially fueled by injecting large batches of Tether into multiple accounts at various trading platforms. And these injections took place exactly at the moment when the price of Bitcoin was declining. In an interview with Bloomberg, the author of the report says that Tether has been used to both stabilize and control the price of Bitcoin.
Prof. Griffin and Amin Shams analyzed the transactions in and out of Bitfinex during a certain period and identified several schemes that prove that a certain group of people successfully pushed the price of Bitcoin when the latter failed on other exchanges. Most of the spikes in the price of Bitcoin are tracked up to hours immediately after the injection of Bitfinex Tether into the accounts of other exchanges. During this time, digital currency prices were growing significantly faster on those crypto platforms that accepted Tether.
In addition, there was a sharp rise in the price of cryptocurrencies that could be purchased using Tether. For example, Ether and Zcash at about the same time went up in percentage terms even more than Bitcoin.
Thus, the owners of Bitfinex successfully manipulated the price on the crypto market, issuing USDT coins (actually not backed by the US dollar), pouring them in to maintain the high Bitcoin rate, and then, at the peak, exchanged the crypto currency for the usual one to replenish the company’s dollar reserves.
After the publication of a sensational report, which caused a discussion in the crypto community, Bitfinex management immediately assured that it had never and in no way participated in any market manipulation. “Our actions with Tether cannot be used to support the price of Bitcoin or any other digital coin,” said Bitfinex CEO Jan Ludvikus van der Velde.
However, crypto market experts and US financial regulators tend to trust the authors of the acclaimed study from the University of Texas more.
Cryptocurrency and Blockchain Experts Support Scandalous Conclusions of Texas Scientists
Colleagues of Griffin and Shams praised the work of the researchers, as similar analysis methods have already been used to identify price fraud.
Sarah Makeljohn, a professor at the University of London, who was the first to investigate such schemes, noted that the analysis and conclusions presented in the article are well founded.
According to the New York Times, Philip Gradwell, chief economist at Chainalysis, a company that analyzes blockchain data, praised the work of his peers and said the research was credible, and an even more complete analysis of the exposed scheme was needed.
“The relationship between Tether and the price of Bitcoin has been under the scrutiny of the crypto community for several months now,” said Christian Catalini, a professor at the Massachusetts Institute of Technology, a blockchain specialist. “It is gratifying to see academic work revealing the causal relationships of fraud in the cryptocurrency market.”
American financial regulators are seriously concerned about the facts of fraud in the crypto space
The US Department of Justice, together with the Commodity Futures Trading Commission (CFTC), also do not deny the existence of possible fraudulent schemes in the digital currency market. Bitfinex’s activity during the period of a sharp rise in the value of Bitcoin has raised suspicions among American financial regulators. Representatives of the Bitfinex exchange, registered in the Caribbean and with numerous offices in Asia, were summoned to the court. There was no direct evidence of fraud on the part of Bitfinex, but the information collected indirectly confirms that the exchange was involved in fraud with the growth of Bitcoin.
Famous exchange platforms such as Bitstamp, Coinbase, itBit and Kraken also came to the attention of the American Themis.
Currently, US financial regulators are asking the cryptocurrency community to take steps to effectively implement policies to identify and assess the full range of risks associated with fraud, including market manipulation. Such a policy should protect against identified risks, assign responsibility for control over them, and initiate investigations into cases of fraud and other illegal actions.