Bitcoin could crash up to 80 per cent if it turns out the price has been artificially pumped up by controversial crytpocurrency tether, analysts have warned.
Tether, a so-called "stablecoin" which aims to maintain a value of one US dollar per tether, has been described as the "ticking time bomb" of the cryptocurrency world which could trigger the next "bloodbath" similar to the 2014 collapse of the Mt. Gox exchange.
And while Japanese exchange Coincheck on Friday confirmed it had lost up to $US530 million ($477m) in a hack worse than the $US450m Mt Gox theft, it's the "tether situation" which has the market on edge.
"Everyone in crypto is very worried about the tether situation, and if these really count as dollars," said David Gerard, author of Attack of the 50 Foot Blockchain.
A key critic of tether and its owner Bitfinex, a cryptocurrency exchange registered in the British Virgin Islands, is a blogger going by the handle Bitfinex'd, who has published a series of detailed blog posts, tweets and YouTube videos outlining the scheme.
In effect, Bitfinex has been accused of creating tether out of thin air, without corresponding US dollar deposits, in order to pump up the price of bitcoin. While Bitfinex insists all new "USDT" are backed by real dollar deposits, new tether issuances have coincided with dips in the price of bitcoin.
Gerard said the market was worried that tether didn't complete its audit. "They say they're fully backed, but they haven't done a full in-depth audit," he said.
"People don't seem to be able to redeem tethers for US dollars at all. The tether web page says they're 'subject to frequent professional audits' — so they need to release those audits, and calm the market."
Meanwhile, criticism of tether and Bitfinex is growing.
Julian Hosp, co-founder of cryptocurrency payment service TenX, has listed tether as one of four big risks, with a 10 per cent likelihood of a crash this year which could pull the market down by 15 per cent.
"Tether gets issued out of thin air through a very complex system, supposedly whenever $US1 is deposited in return," he wrote on CNBC.
"At the moment, tether is priced at around $US1.6 billion, which supposedly means $US1.6 billion actually went into that cryptocurrency.
"According to some reports, however, there isn't actually $US1.6b backing up the token. Since many exchanges and other cryptocurrencies are connected to tether, any finding that its stated value is untrue would send the market into a significant decline."
Professor Nicholas Weaver from UC Berkeley's International Computer Science Institute has warned of a "bloodbath" in cryptocurrency prices if the "Tether printing press ever breaks".
"At current prices, net new bitcoin requires $US18 million of net new $ flowing in to maintain the price," he wrote on Twitter. "Yet there is a net $US100 million per day of fake $ in the form of tethers."
New York University professor of economics Nouriel Roubini agreed.
"Indeed tether/USDT used to manipulate bitcoin prices," he wrote.
"Without this bitcoin price would collapse by 80 per cent. Regulators asleep at the wheel while $US2b of fake $ created, half of it since December. Not even North Korea created so many fake $ backed by nothing."
Tether and Bitfinex have been contacted for comment. In a recent statement, the company rejected online criticisms as "misinformation" spread by "a small group of individuals".
"We have also read online about many outlandish conspiracy theories suggesting that tether is not backed 1:1 by currency on deposit with banking institutions," the statement said. "Any such claim is unequivocally false, and the audits will bear that out.
"The company considers all tethers outstanding to be liabilities for presentation on the balance sheet for which there is always an equivalent amount (or greater) held in assets to back those presented liabilities. Full stop."
In December, Bitfinex threatened legal action against Bitfinex'd.
"To date, every claim made by these bad actors has been patently false and made simply to agitate the cryptocurrency ecosystem," the company said in a statement at the time. "As a result, Bitfinex has decided to assert all of its legal rights and remedies against this agitator and his associates."
Last week, an anonymous analyst backed up those claims in a report titled "Quantifying the Effect of Tether", which concluded that it was "highly unlikely that tether is growing through any organic business process, rather that they are printing in response to market conditions".
"Tether printing moves the market appreciably," concluded the report, which compared bitcoin price movements before and after new tether issuance, as well as analysing publicly available tether transaction statistics using forensic accounting techniques.
"48.8 per cent of BTC's price rise in the period studied occurred in the two-hour periods following the arrival of 91 different tether grants to the Bitfinex wallet," the report said.
"Bitfinex withdrawal/deposit statistics are unusual and would give rise to further scrutiny in a typical accounting environment. If there is questionable activity, the author believes a 30-80 per cent reduction in BTC price could be forecast."
Bitfinex has repeatedly promised investors it would produce a full audit of its books to prove it has US dollars on deposit to calm fears, but no audit has taken place.
Over the weekend, Bitfinex confirmed speculation it had severed ties with its auditor, Friedman LLP, which had earlier scrubbed all references to Bitfinex from its website. "We confirm that the relationship with Friedman is dissolved," a spokesman told industry website CoinDesk.
"Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of tether, it became clear that an audit would be unattainable in a reasonable time frame.
"As tether is the first company in the space to undergo this process and pursue this level of transparency, there is no precedent set to guide the process nor any benchmark against which to measure its success."