Courtesy of Pam Martens
Finance Professor John Griffin and fellow researcher Amin Shams, both at the University of Texas, released a study yesterday that is causing alarm bells to ring for investors in Bitcoin and other digital currencies. Titled “Is Bitcoin Really Un-Tethered?” the researchers found strong evidence that Tether, another digital currency, is being used to artificially support the price of Bitcoin when it comes under selling pressure. Griffin and Shams found further that “Tether seems to be used both to stabilize and manipulate Bitcoin prices.”
Bitcoin soared over 1400 percent last year but has been selling off this year. It’s lost about 70 percent from the peak it set last year, and has been on the edge since then.
The researchers write:
“To illustrate the potential magnitude and predictive effect of Tether issuances on Bitcoin prices, we focus on the hours with the largest lagged combined Bitcoin and Tether ?ows on the two blockchains. These 87 hours have large negative returns before the ?ows but are followed by large return reversals. These 87 events account for less than 1% of our time series (over the period from the beginning of March 2017 to the end of March 2018), yet are associated with 50% of Bitcoin’s compounded return, and 64% of the returns on six other large cryptocurrencies (Dash, Ethereum Classic, Ethereum, Litecoin, Monero, and Zcash). A bootstrap analysis with 10,000 simulations demonstrates that this behavior never occurs randomly. Consistent with Tether being used to buy Bitcoin when prices drop, we ?nd a statistically and economically strong reversal in Bitcoin prices, but only following negative returns. The Bitcoin reversal did not exist before Tether was prevalent in the market and disappears during the period when Tether stops being printed.”
According to media reports, the U.S. Department of Justice has an ongoing criminal investigation into the potential manipulation of Bitcoin and other digital currencies.
Griffin and Shams set the stage for their findings with an historic assessment of market bubbles with fraudulent underpinnings. They write:
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