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More questions on ‘forces’ hitting the price of Bitcoin

Bitcoin is falling. Again. After sliding sharply on Sunday, the world’s most popular crypto-currency and oldest (it turns 10 this year), yo-yo-ed around $6,750 this week before falling again to below $6,500 this morning. It’s now at its lowest price since February.

There are many who are forecasting further and sharper falls, including – perhaps predictably – New York University economics professor Nouriel Roubini, or “Dr. Doom” as he is better known in the crypto-currency community. Roubini took to Twitter once again to say Bitcoin will soon “get close to zero.”

“The bubble has already burst. Bitcoin has lost almost 80% of its value, from $20K to close to $6k. Another 90%” drop, argued Roubini, is “still to come.”

The weekend price tumble was initially attributed to market jitters after another exchange was hacked in South Korea and more regulatory pressure came from Washington. But there does seem to be something more fundamental in play too.

Yesterday two academics, John Griffin and Amin Shams from the University of Texas’ Department of Finance, published a 66-page report entitled “Is Bitcoin Really Un-Tethered?”

The report sets out to investigate “whether Tether, a digital currency pegged to US dollars, influences Bitcoin and other crypto-currency prices during the recent boom.”

Rumors have been bouncing around for more than a year about the Tether coin and also the Bitfinex exchange that it is linked with. Critics say Tether has been issuing more tokens than it has dollars, its trading volume regularly exceeds its market cap and it has never been able to conclusively prove how big its US-dollar reserve actually is. At the end of 2017, the US Commodity Futures Trading Commission reportedly sent subpoenas to both Bitfinex and Tether, although none of the parties involved has ever formally confirmed this.

Griffin and Shams looked at Bitcoin purchases made with Tether and saw that they follow “market downturns and result in sizeable increases in Bitcoin prices.” The correlation between Tether transactions and “meteoric rises” in the price of Bitcoin, write the academics, “cannot be explained by investor demand proxies” but instead seem to indicate that Tether is being “used to provide price support and manipulate cryptocurrency prices.”

The publication of this paper comes right on the back of some fairly detailed reporting across the international media, that again examines Bitcoin price trends.

Something like 1,000 accounts, out of a total 11 million, hold more than 35% of all Bitcoin, reported AFP this week after studying data proved by BitInfoCharts. These so-called “whales” own such a high proportion of Bitcoin that they could collude to “control the currency,” crypto commentator Bob McDowall told AFP, and “dictate monetary policy, which is normally the function of a central bank or a government.”

The Financial Times touched on the same area this week. Before last December’s Bitcoin price peak, the market was dominated by long-term investors, said the FT. In November 2017, the amount of bitcoin held for long-term investment was roughly three times that held by speculative traders. By April 2018, data from Chainalysis shows this gap had drastically shrunk, with investors now owning about six million bitcoins while short-term speculators held more than five million.

Chainalysis estimates that the long-term holders sold more than $30 billion worth of Bitcoin to speculators between the December and April, with half of these sales taking place in December alone. This was, according to Chainalysis, “an exceptional transfer of wealth,” that in turn, has caused a huge injection of liquidity into the Bitcoin market. It is, says Chainalysis, a “fundamental driver” behind the recent price downturn.

In May, the US Justice Department started a criminal investigation into possible market manipulation of Bitcoin and other cryptos after suspecting players of “spoof” trading where they flood the market with false orders before rapidly withdraw them without completing the purchase. They still, however, manage to move the currency’s price.

Washington will be looking into whether, to prevent excessive falls in the value of Bitcoin, these “whales” – who are often the crypto-currency exchange owners – are checking with each other first before placing major orders. According to Coinmarketcap, nearly $185 billion worth of BTC was traded in May. The second most traded cryptocurrency during May was Tether, that traded almost $93 billion. The daily Tether trade volumes in May oscillated widely between approximately $1.8 billion daily and $4.75 billion. Why?

The big online exchanges have created fortunes for their owners. But they’ve also drawn criticism for being largely unregulated and besieged by hackers. If a $30-million exchange hack in Korea punches the market down, as it was meant to have done on Sunday, what will happen if the world finds out that the whole thing might be a multi-billion smoke-and-mirrors hustle?

This topic, for sure, is not going to disappear anytime soon.

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