Bitcoin's meteoric price rise was down to 'market manipulation'

by 14/06/2018 08:07:00 0 comments 1 Views

Is Bitcoin a SCAM? Cryptocurrency's huge price spike last year was caused by massive 'market manipulation', claims study

  • Just 87 Bitcoin purchases drove more than 50 per cent of its price rise last year
  • This unusual trading behaviour was spotted by a cryptocurrency market expert  
  • It is believed traders used another currency, called Tether, to protect Bitcoin  
  • Bitcoin's stock dropped to a four month low this week as a result of the findings

By Associated Press and Joe Pinkstone For Mailonline

Published: 09:01 EDT, 13 June 2018 | Updated: 08:07 EDT, 14 June 2018

Bitcoins incredible rise in value in the last 12 months has been down to massive market manipulation, a new study has revealed.

During the 2017 peak, which topped out at almost $20,000 (£15,000) per coin, traders were using a separate cryptocurrency called Tether to manipulate its value. 

These actions, rather than real demand from investors, propped up the prices of Bitcoin when it was faltering and resulted in the currency's meteoric rise.

Bitcoin's price has now crashed to $6,370 (£4,740) - a four month low - following publication of the study. 

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Bitcoins rise in value in the last 12 months was down to artificial inflation, experts have revealed. During the 2017 peak, which topped out at almost $20,000 per coin, traders were using a separate crytpocurreny - Tether - to manipulate the stock prices
Bitcoins rise in value in the last 12 months was down to artificial inflation, experts have revealed. During the 2017 peak, which topped out at almost $20,000 per coin, traders were using a separate crytpocurreny - Tether - to manipulate the stock prices

Bitcoins rise in value in the last 12 months was down to artificial inflation, experts have revealed. During the 2017 peak, which topped out at almost $20,000 per coin, traders were using a separate crytpocurreny - Tether - to manipulate the stock prices

In a new paper, titled 'Is Bitcoin Really Un-Tethered?', University of Texas finance professor John Griffin, and graduate student Amin Shams, look at how Bitcoin's price may have been artificially inflated last year.

The team looked at the flow of digital currency entering and leaving ocryptocurrency exchange, Bitfinex.

They spotted several patterns that would suggest someone, or a group, had propped up Bitcoin prices when they'd fallen.

To do this, the scammers purchased Bitcoin using a secondary currency known as Tether. 

Tether, created, and sold, by the owners of Bitfinex, is backed by the US dollar.

For every coin of Tether, there is $1 (£0.74) of real money in the bank, making it more stable than alternatives, such as Bitcoin. 

This meant it also allowed investors to offload Bitcoin into Tether during wild price swings as a means to avoid substantial losses, according to the Nextweb.   

'Tether seems to be used both to stabilise and manipulate Bitcoin prices,' finance professor John Griffin and co-author Amin Shams wrote in a paper released this week. 

Professor Griffin is an academic with a history of spotting fraud in financial markets. 

In their research, the virtual currency experts looked at 87 of the largest purchases of Bitcoin with Tether from March 2017 to March 2018.

Before these purchases, Tether had been issued only a few days before hand and Bitcoin's price had dropped within an hour. 

The end result was a boost to Bitcoin's price. 

These 87 examples represent a tiny proportion of the time period studied (less than one per cent) but the purchases accounted for more than 50 per cent of the currency's compounded return. 

WHAT IS A BITCOIN? A LOOK AT THE DIGITAL CURRENCY

What is a Bitcoin?   

Bitcoin is what is referred to  as a 'crypto-currency.' 

It is the internet's version of money - a unique pieces of digital property that can be transferred from one person to another.

Bitcoins are generated by using an open-source computer program to solve complex math problems. This process is known as mining.  

Each Bitcoin has it's own unique fingerprint and is defined by a public address and a private key - or strings of numbers and letters that give each a specific identity.

They are also characterized by their position in a public database of all Bitcoin transactions known as the blockchain. 

The blockchain is maintained by a distributed network of computers around the world.

Because Bitcoins allow people to trade money without a third party getting involved, they have become popular with libertarians as well as technophiles, speculators — and criminals.

Where do Bitcoins come from?

People create Bitcoins through mining.

Mining is the process of solving complex math problems using computers running Bitcoin software.

These mining puzzles get increasingly harder as more Bitcoins enter circulation.

The rewards are cut in half at regular intervals due to a deliberate slowdown in the rate at which new Bitcoins enter circulation. 

Who's behind the currency?

Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto and then adopted by a small clutch of enthusiasts.

Nakamoto dropped off the map as Bitcoin began to attract widespread attention, but proponents say that doesn't matter: the currency obeys its own, internal logic.

Dr Craig Wright was suspected as the creator following a report by Wired last year and he has now confirmed his identity as the cryptocurrency's founder.  

What's a bitcoin worth?

Like any other currency, Bitcoins are only worth as much as you and your counterpart want them to be. 

Bitcoins are lines of computer code that are digitally signed each time they travel from one owner to the next. Physical coin used as an illustration
Bitcoins are lines of computer code that are digitally signed each time they travel from one owner to the next. Physical coin used as an illustration

Bitcoins are lines of computer code that are digitally signed each time they travel from one owner to the next. Physical coin used as an illustration

In its early days, boosters swapped Bitcoins back and forth for minor favours or just as a game. 

One website even gave them away for free. 

As the market matured, the value of each Bitcoin grew.

Is the currency widely used?

That's debatable.

Businesses ranging from blogging platform Wordpress to retailer Overstock have jumped on the Bitcoin bandwagon amid a flurry of media coverage, but it's not clear whether the currency has really taken off. 

On the one hand, leading Bitcoin payment processor BitPay works with more than 20,000 businesses - roughly five times more than it did last year. 

On the other, the total number of Bitcoin transactions has stayed roughly constant at between 60,000 and 70,000 per day over the same period, according to Bitcoin wallet site blockchain.info.

Is Bitcoin particularly vulnerable to counterfeiting?

The Bitcoin network works by harnessing individuals' greed for the collective good. 

A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. 

The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional Bitcoin. 

As long as miners keep the blockchain secure, counterfeiting shouldn't be an issue.

'There were obviously tremendous price increases last year, and this paper indicates that manipulation played a large part in those price increases,' Professor Griffin said.

The 66-page paper has no proof against Bitfinex, which is registered in the Caribbean with offices in Asia.

Shortly after the report was released, American regulators subpoenaed the company and the price of Bitcoin dropped by two per cent against the dollar. 

Since then, the currency has rallied slightly, and is now only 1.5 per cent below the dollar. 

In their research, the virtual currency experts looked at 87 of the largest purchases of Bitcoin with Tether from March 2017 to March 2018. These examples represent less than one per cent of the time period but accounted for more than 50 per cent of the currency's rise 
In their research, the virtual currency experts looked at 87 of the largest purchases of Bitcoin with Tether from March 2017 to March 2018. These examples represent less than one per cent of the time period but accounted for more than 50 per cent of the currency's rise 

In their research, the virtual currency experts looked at 87 of the largest purchases of Bitcoin with Tether from March 2017 to March 2018. These examples represent less than one per cent of the time period but accounted for more than 50 per cent of the currency's rise 

Bitfinex has refuted any wrongdoing. 

In a statement obtained by the New York Times, Bitfinex CEO JL van der Velde said: 'Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of Bitcoin or any other coin/token on Bitfinex.'

As well as the damning report, other factors have compounded Bitcoin's plight.  

South Korean digital currency exchange Coinrail said hackers had stolen over $37 million (£27.5 million), or almost a third of the virtual currency it had stored. 

WHAT DOES WARREN BUFFETT THINK ABOUT BITCOIN?

Warren Buffett (pictured) is one of the most influential and successful businessmen of his generation
Warren Buffett (pictured) is one of the most influential and successful businessmen of his generation

Warren Buffett (pictured) is one of the most influential and successful businessmen of his generation

Warren Buffett is one of the most influential and successful businessmen of his generation. 

The 87-year-old tycoon founded the business empire Berkshire Hathaway.

As CEO and founder of this company and one of the richest men in the world, his investments have been wide-ranging and vast.

In May 2018, he sent Apple shares to an all-time high after he bought 75 million shares in the first quarter of the year. 

Since Bitcoin became a sensation at the end of 2017 and the price of the currency went through the roof, Mr Buffett has steadfastly remained sceptical.  

Back in May, Buffett revealed to CNBS that bitcoin was 'probably rat poison squared.'

The main issue that Buffett has with Bitcoin, is that it has no intrinsic value.

'If you buy something like bitcoin or some cryptocurrency, you don't have anything that is producing anything,' Buffett said in an interview with Yahoo Finance.

'You're just hoping the next guy pays more. And you only feel you'll find the next guy to pay more if he thinks he's going to find someone that's going to pay more.

'You aren't investing when you do that, you're speculating.'

The theft at Coinrail is not the first time a digital currency exchange has been broken into. The most famous example was Mt. Gox, which got broken into in 2014. 

Thieves were able to steal $480 million (£357 million) in digital currencies. Another exchange, Coincheck, had at least $400 million (£298 million) stolen in digital currency earlier this year.

Earlier this year, legendary investor Warren Bufett, known as the Sage of Omaha for his money-making savvy, predicted the Bitcoin frenzy would end in disaster. 

He said: 'In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.' 

After admitting he was unsure about the intricacies of the currency's operations, he said he would never deal in the virtual currency. 

'We don't own any, we're not short any, we'll never have a position in them,' he said.

'I get into enough trouble with things I think I know something about', he said.

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