Bitcoin may be reaching the end of its tether.
Already down more than 50 per cent from its peak at the height of crypto-mania last year, bitcoin has been battered this week by fresh claims its price has been artificially manipulated by the digital currency tether.
"It is the mother of all crypto criminal scams," economist Nouriel Roubini wrote on Twitter. "Clear evidence and proof of massive criminal price manipulation. When will the SEC and CFTC indict and put these criminals in jail?"
Tether is a so-called "stablecoin" pegged at one-to-one value with the US dollar. Each of the $US2.2 billion worth of tether in existence is supposedly backed by a real US dollar deposit sitting in a bank account belonging to tether's creator Bitfinex, a cryptocurrency exchange registered in the British Virgin Islands.
Critics, notably an anonymous blogger going by the handle Bitfinex'ed, have since last year alleged that tether is actually being printed out of thin air, without corresponding dollar deposits. In January, Mr Roubini predicted that "without this scam" bitcoin's price "would collapse by 80 per cent".
Now, a research paper by University of Texas finance professor John Griffin — who specialises in uncovering fraud in traditional financial markets — and graduate student Amin Shams, has thrown new weight behind those claims.
"We examine whether the growth of a pegged cryptocurrency, tether, is primarily driven by investor demand, or is supplied to investors as a scheme to profit from pushing cryptocurrency prices up," they wrote.
"Using algorithms to analyse the blockchain data, we find that purchases with tether are timed following market downturns and result in sizeable increases in bitcoin prices. Less than 1 per cent of hours with such heavy tether transactions are associated with 50 per cent of the meteoric rise in bitcoin and 64 per cent of other top cryptocurrencies."
In the paper, the researchers investigated whether tether creation was "pulled" (demand-driven) or "pushed" (supply-driven). That is, whether tether was being created in response to real investors handing over US dollars, or "pushed" into the market — without real dollars backing them — to purchase bitcoin and other cryptocurrencies.
"Our results are consistent with Tether being pushed out on to the market and not primarily driven by investors' demand," they wrote.
"In this setting, the tether creators have several potential motives.
"First, if the tether founders, like most early cryptocurrency adopters and exchanges, are long on bitcoin, they have a large incentive to create an artificial demand for bitcoin and other cryptocurrencies by 'printing' tether. Similar to the inflationary effect of printing additional money, this can push cryptocurrency prices up.
"Second, the co-ordinated supply of tether creates an opportunity to manipulate cryptocurrencies. When prices are falling, the tether creators can convert their tether into bitcoin in a way that pushes bitcoin up and then sell some bitcoin back into dollars to replenish tether reserves as bitcoin price rises.
"Finally, if cryptocurrency prices crash, tether creators essentially have a put option to default on redeeming tether, or to potentially experience a 'hack' where tether or related dollars disappear."
The researchers found tether issuances tended to occur when bitcoin reached psychologically significant "round number thresholds", presumably in order to "generate buy and sell signals" to other traders.
"These patterns cannot be explained by investor demand proxies but are most consistent with the supply-based hypothesis where tether is used to provide price support and manipulate cryptocurrency prices," they wrote.
"Overall, our findings provide substantial support for the view that price manipulation may be behind substantial distortive effects in cryptocurrencies. These findings suggest that external capital market surveillance and monitoring may be necessary to obtain a market that is truly free."
Bitfinex has been contacted for comment.
In response to the paper, Bitfinex chief executive J.L. van der Velde told the Financial Times in an emailed statement, "Bitfinex nor Tether [sic] 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."
Bitcoin has lost about 12.5 per cent of its value since Monday, down from around $US7200 to $US6300 at the time of writing. The total market capitalisation of more than 1600 cryptocurrencies tracked by Coinmarketcap currently sits at just under $US280 billion.