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The Tether-Bitfinex situation is setting up a bitcoin crisis

The Commodity Futures Trading Commission has some questions for you

Fake Tethers under fake bitcoins.

Fake Tethers under fake bitcoins. It’s an illustration of what may be happening (Photo via Shutterstock).

Here’s the statistic riding a jet ski through the cryptocurrency community’s living room today: one-third of all Tether in existence was created after the company was subpoenaed.

If you’re just joining us, Tether is the cryptocurrency created by the founders of Bitfinex, a crypto exchange that bears the distinction of being not only shady as hell, but home to more trading activity than any other exchange.

It came out this week that Bitfinex was subpoenaed on December 6th by the Commodity Futures Trading Commission, and charts reveal a major uptick in market capitalization immediately after the companies were called to court.

 

Tether's price is tied to the U.S. dollar but the quantity has soared.

Tether’s market cap from April 30, 2017 to Feb 2, 2018. The price is tied to the U.S. dollar but the quantity has soared (via CoinMarketCap).

There’s a steady positive trend beginning in November, but there are some aggressive, stairstep-like upticks in market cap on December 29th, January 4th, and January 16th. These still are nothing by comparison to the surge on January 27, which saw Tether’s capitalization peak at $2.2 billion. Since the Tether cryptocurrency is pegged to the dollar, this should mean that the company has $2.2 billion on reserve, yet it can’t confirm that it does.

Subpoenaed in early December, Tether has added 850 million coins to its ecosystem in January alone. The concern is that the company could have been using this stash of dollar-pegged cryptocurrency to buy enough bitcoin and other currencies to sway their prices. If that’s the case, the pair of companies, Bitfinex and Tether, could be getting some extra special attention from regulators (and the judicial system) to sort things out.

Bitfinex has been plagued by accusations of insider trading for much of its existence. The company has lost millions of dollars to hacker attacks, one every year for the past three years. A leak from 2013 suggests the company would credit people money that they hadn’t deposited. In June 2016, the CFTC fined Bitfinex $75,000 for offering “illegal” cryptocurrency transactions and for failing to register as a futures commission merchant.

The picture isn’t exactly one of consumer confidence, and bitcoin’s current price reflects the mood: it’s below $9,000, coming back from below $8,000 for new two-month lows. The only statement Bitfinex and Tether have issued on the subpoena is one of no comment.

If a cryptocurrency that’s purportedly backed by the dollar proves to be fraudulent, it will have lasting negative impacts on the cryptocurrency market at large.

Dylan Love is an editorial consultant, contributing reporter, and fiendishly curious technology enthusiast. He owns no cryptocurrencies.