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Opinion,  Tether

Tether/Bitfinex study gets updated while Crypto Twitter gets angry

The report that claimed Bitcoin prices were manipulated via Tether now says a single “whale” was behind the trades; those with skin in the game react negatively

It’s never a dull moment in the world of Tether and Bitfinex.

The lead academic in that (in)famous study postulating that Bitcoin prices were manipulated by Tether updated it with this added doozey: a single “whale” was behind most of it, trading large amounts of bitcoin against tether on Bitfinex, Tether’s sister company.

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As Bloomberg reported on Monday, University of Texas’ John Griffin put in more detail to the now peer-reviewed paper he did with Ohio State University’s Amin Shams:

“Our results suggest instead of thousands of investors moving the price of Bitcoin, it’s just one large one,” Griffin said in an interview. “Years from now, people will be surprised to learn investors handed over billions to people they didn’t know and who faced little oversight.”

And sure enough, on page 6 of the paper, revised October 28, 2019:

“A further detailed analysis for the single largest player on Bitfinex shows that the 1%, 5%, and 10% of hours with the highest lagged flow of Tether by this one player are associated with 55%, 67.2%, and 79.2% of Bitcoin’s price increase over our March 1, 2017 to March 31, 2018 sample period. This pattern is not present for the flows to any other Tether exchanges, and simulations show that these patterns are highly unlikely to be due to chance; this one large player or entity either exhibited clairvoyant market timing or exerted an extremely large price impact on Bitcoin that is not observed in the aggregate flows from other smaller traders. Such a trading pattern by this one player is also large enough to induce a statistically and economically strong reversal in Bitcoin prices following negative returns.”

And then in the middle of the next paragraph:

“Interestingly, Bitcoin purchases from Bitfinex strongly increase just below multiples of 500. This pattern is only present in periods following printing of Tether, driven by the single large account holder, and not observed by other exchanges [emphasis ours]. To address causality, we use the discontinuity in Tether flow at the round threshold cutoffs as an instrument and find that Tether flows are causing the positive Bitcoin return.

“The patterns observed above are consistent either with one large player  [emphasis ours] purchasing Tether with cash at Bitfinex and then exchanging it for Bitcoin, or Tether being printed without cash backup and pushed out through Bitfinex in exchange for Bitcoin. If Tether is pushed out to other crypto-exchanges rather than demanded by cash investors, it may not be always fully backed, and to show the full reserve, Bitfinex might have to liquidate their Bitcoin reserve to support their end-of-the-month (EOM) bank statements.”

On page 25, there’s this eye-popping piece of data:

“81% of the Tether flows from Bitfinex to Poloniex and Bittrex are through one large deposit address for each exchange. This account is responsible for 47% of all Tether flows from Bitfinex to all Tether exchanges combined.”

The updated report is now 119 pages and full of all sorts of neat charts and graphics.

Naturally, since this involves Tether and Bitfinex, the Crypto Twitter has been buzzing with lots of incredulous responses.

It’s no surprise Paolo Ardoino, CTO for both Tether and Bitfinex, weighed in. The two companies used to keep a fairly low profile but Ardoino has gone on the offensive in recent months.

“I had the luck in my career to know a lot of academics, each one of them had profound sense of work ethics,” tweeted Ardoino. “Research papers where [sic] a serious thing back in the days (Pepperidge Farm). Hardly they were keeping changing target trying to make sense of their hypothesis.”

Mati Greenspan, senior analyst at eToro, cites anecdotal evidence that Bitcoin’s demand was organic.

“Let me just say for the record, there is no methodology on the planet that will convince me that this narrative is accurate,” Greenspan wrote in eToro’s newsletter. “The simple matter is that I personally witnessed the 2017 rally, as did many of you, and it wasn’t anything that could possibly have been caused by any single whale. In those few months, millions of verified retail accounts were opened here at eToro in order to trade crypto and it was the same throughout all exchanges, many of which had to stop accepting new clients because they simply couldn’t keep up. Servers crashed under the weight of the sheer traffic and the attention in the media was overwhelming.”

Still, as Larry Cermak of The Block pointed out on Twitter, the fact that the study is now peer reviewed and will be published by the Journal of Finance is a direct counter to a long-standing charge by Tether’s management that the report is hollow. Both Cermak and Greenspan reminded readers that Alex Krüger published a scathing take-down of Griffin and Shams’ piece back in January. However, it seems the two academics responded with some of the details Krüger said were lacking in their initial report.

Not everyone was impressed.

“The journal of finance should be ashamed for publishing that misleading article on tether,” tweeted VanEck Director of Digital Strategy Gabor Gurbacs. “It’s riddled with elementary causality errors and shows a deep misunderstanding of both capital market and digital asset market structure. Peer review seems to mean nothing in these days.”

As if reading from the same playbook as Greenspan, Gurbacs also claimed in a tweet that Bitcoin’s rally was organic:

“I continue to be disappointed by career academics that fail to understand Bitcoin/crypto market structure basics as well as the fundamentals of cause and effect. The rise of tether is a result of organic bitcoin and crypto demand in periods of hyper growth.”

He even tweeted this nod to Tyler Vigen’s great Spurious Correlation site:

Yet it’s no surprise Gurbacs should despise the Griffin and Shams study. The Securities and Exchange Commission shot down the proposed VanEck SolidX Bitcoin ETF because the regulator felt Bitcoin’s prices were being manipulated.

Not to be left out of the conversation, Ari Paul, BlockTower Capital’s Twitter-happy CIO, chimed in with this criticism (hat tip to Decrypt)—that namely everything seems to be from one account at Bitfinex because of custodianship and how crypto exchanges manage all their accounts:

Nonetheless, despite all these criticisms, there’s one important audience for Griffin and Shams—U.S. regulators. And given that the SEC based their refusal to let pension funds or the public put their retirement money in a Bitcoin ETF on the academic’s research, all the bellyaching on Twitter means little, especially from those in crypto who have a stake in saying there’s no manipulation.

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.

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