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Economics professor John Griffin recently published a paper based on data that reveal market manipulation through Tether (USDT) tokens on the Bitfinex exchange. The paper reveals a trend that was only a social media meme, and was accepted with skepticism. But trading data reveal a pattern of behavior, especially strong after March 2017, when Bitcoin prices started to take off, to reach a peak near $20,000 in December.

“The hype in cryptocurrency isn’t just 20-year-olds buying Bitcoin in their garage -- that’s part of it - but there are big players moving the market and having a huge price impact,” Griffin said for Bloomberg.

The paper, co-authored with Amin Shams, looks at patterns where new Tethers are issued while Bitcoin slides, and then sent to Bitfinex to prop up the price and create hype for buyers. Griffin believes Tethers have a double effect - avoiding panic and stabilizing Bitcoin when interest flags, thus supporting the trend; but also the possibility for outright manipulation and orders that bait traders to make risky decisions.

“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. Less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies,” argues the paper.

Bitcoin trading is fully unregulated, and the market behavior of bots, whales, or other entities is easier to notice and discern. Usually, Bitcoin’s rise happened within hours, if not minutes, creating additional hype and buying from a wider circle of investors.

Griffin notes the increased public interest into Bitcoin. But he also presents the hypothesis that Tethers do not reflect real market demand. In contrast, they are “pushed” onto the market to create artificial demand.

“Similar to the inflationary effect of printing additional money, this can push cryptocurrency prices up,” explains the paper.

The hypotheses also suggest that Tethers may be issues as a form of fractional reserve banking activity, an injection of liquidity that is only later backed by gains. This means that Tethers are printed in order to bait real dollar investors to buy up Bitcoin for cash. If Bitfinex and Tether, which share a management team, sell Bitcoin to cash buyers, they could build a real backing for Tethers, in part or in whole. But the effect would be an artificial exuberance and extra liquidity where investors would be far more cautious without the incentive.

The in-depth discussion and evidence of the effect of Tethers comes at a moment when an investigation was launched against four exchanges on possible Bitcoin price manipulation.

The Tether digital assets have increased to about 2.5 billion tokens after one last printing a few weeks ago. Since then, a new asset, True USD (TUSD) entered the scene, this time supposedly not pushing assets, but waiting for real dollar buying. Tether trading also moved from Bitcoin and into altcoins, with Binance opening up pairs against USDT almost every day. Thus, the increased liquidity may lead to a similar growth in the price of some smaller digital assets.

After Tethers moved out of Bitcoin in the past months, the asset slid, with the latest shakedown taking BTC prices to $6,514.46. The share of Tether trading has increased to record levels, with more than 18% of crypto trades achieved against the fixed price token. This outstrips any activity with exchange coins, and other fixed-price assets. As investor enthusiasm wanes, and new inflows of cash may be slower, the crypto market is notably relying on Tethers to keep the trades flowing.