Comment by neiman | Hacker News Reader

Comment by neiman | Hacker News Reader

It's impossible to have a discussion based on news reports, so here's a link for the original paper. I copied the title and abstract below.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066

I browsed through the paper. Their main result, if I understood correctly, is that they found "considerable evidence that Tether is used to purchase Bitcoin following Tether authorization and a drop in Bitcoin price, and that this phenomenon has a sizable relation to future Bitcoin prices and other coins."

This result, if true, does not imply directly the conclusion ("rally caused by single whale").

First, it doesn't explain the original raise of the price before the fall (that followed with tether purchases). Second, these results can have, I think, alternative explanations. For example, Tether was used as a tool for shorting Bitcoin, hence it makes sense that it be sold after Bitcoin price drops.

I write this with knowing that perhaps my interpretation of the paper is wrong, since it relies heavily on professional jargon I'm not familiar with.

------------------------------- title: Is Bitcoin Really Un-Tethered?

Abstract: This paper investigates whether Tether, a digital currency pegged to the U.S.dollar, influenced Bitcoin and other cryptocurrency prices during the 2017 boom. Using algorithms to analyze blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month-ends. Rather than demand from cash investors, these patterns are most consistent with the supply-based hypothesis of unbacked digital money inflating cryptocurrency prices.

I applaud going back to the original source, but the paper has been updated.

See this better Bloomberg article: https://www.bloomberg.com/news/articles/2019-11-04/lone-bitc...

Relevant quotes:

> One entity on the cryptocurrency exchange Bitfinex appears capable of sending the price of Bitcoin higher when it falls below certain thresholds, according to University of Texas Professor John Griffin and Ohio State University’s Amin Shams. Griffin and Shams, who have updated a paper they first published in 2018, say the transactions rely on Tether, a widely used digital token that is meant to hold its value at $1.

> “Our results suggest instead of thousands of investors moving the price of Bitcoin, it’s just one large one,” Griffin said in an interview. “Years from now, people will be surprised to learn investors handed over billions to people they didn’t know and who faced little oversight.”

> “This pattern is only present in periods following printing of Tether, driven by a single large account holder, and not observed by other exchanges,” they wrote in their new peer-reviewed paper, set to be published in a forthcoming Journal of Finance.

> “Simulations show that these patterns are highly unlikely to be due to chance. This one large player or entity either exhibited clairvoyant market timing or exerted an extremely large price impact on Bitcoin that is not observed in aggregate flows from other smaller traders.”

Damn, you're right, I linked the old paper. Oops!

But it seems that the new one is "set to be published in a forthcoming Journal of Finance". So it's not published yet.

I find it impossible to have a discussion based on Bloomberg article, as good as it my be.

Tether is starting to look like a Madoff-scale Ponzi scam. What maintains the $1 price of Tether is a continual net inflow of cash. Tether is known not to be backed with sufficient real assets.[1] If there's a period of net outflow from Tether, the whole house of cards comes crashing down.

[1] https://www.marketwatch.com/story/tether-reverses-claim-of-1...

Also: https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/

It's looked like a Madoff-scale Ponzi scam for a long time. Even in 2017, when the world was gaga over cryptocurrencies, people were saying that the Tether stuff is super sketchy.

There was a near-run on Tether this May, though, and ironically that's what pumped Bitcoin from $5300 to $8000. When folks want to dump Tether, they generally cannot dump it directly into dollars. They have to dump to Bitcoin, move it off-exchange, and then sell the dollars on an exchange with fiat currency. That means that every Tether dump creates a run on Bitcoin, which pushes the price higher. If the arbitrage trade is interrupted (as it was in May, when Binance and Bitfinex both shut down withdrawals just as the run was beginning), then the price of Bitcoin remains permanently high, and instead of selling Bitcoin on other exchanges to compensate, people buy them to match the new price, the public forgets about the panic when withdrawals open 2 weeks later, and the price remains permanently high.

I wonder also if at some point Bitfinex can just make up Tether's reserve shortfall out of their profits. (Actually, they claim that they made up the shortfall already with their Tokinex IEO, which was also super sketchy, but even if they hadn't...) Coinbase reportedly made $1B in profit in 2017 and about $400-500M in 2018; Bitfinex is of similar size, so a couple years like that and their profits could probably plug the hole, if they don't get sued/regulated out of existence first.

> When folks want to dump Tether, they generally cannot dump it directly into dollars. They have to dump to Bitcoin, move it off-exchange, and then sell the dollars on an exchange with fiat currency.

Not sure where you got that from, but that's not true whatsoever; USDT/USD is a thing in a bunch of exchanges with really healthy volume. Other than a few months ago (perhaps the run you mentioned in May) there's normally no premium and the peg is down or up by perhaps 0.5% or so.

Maybe you are saying that because Binance, the largest exchange doesn't have a USDT/USD pair (they don't have any USD pair afaik), but you can easily withdraw USDT and sell them for USD directly in other exchanges.

It's a thing on Kraken and Bittrex, with about $2M in daily volume on Kraken and $290K on Bittrex. That's a lot of trading days to absorb the $4.1B market cap of Tether or even the $800M that are reportedly unbacked.

Also volume != liquidity

> Tether is known not to be backed with sufficient real assets.

You just gave a definition of fractional reserve banking.

No, fractional reserve banking does not work that way, despite what the cryptocurrency community thinks. Most of a bank's assets are in the form of loans to others, usually with real assets, like houses or cars, behind them. The risks are loans going bad, and owning long term loans while taking short term deposits.

illiquid != insolvent.

If I have a house, I can't turn it into cash immediately. I may have a fraction of my net worth in cash. That's not the same thing as only having the small amount of cash and nothing else.

The difference between Tether and Madoff is that people have been loudly yelling "scam", in public, for years about Tether.

When Madoff collapsed, his investors were shocked. If Tether collapses, precisely zero people will be surprised.

When it's common knowledge that it's a scam, is it still a scam?

Probably we can think of Tether as a type of lottery

If the dollar peg has staid for years, how risky lottery it is to do short term value transfers with it? It is obvious that it shouldnt be used for long term value storage. However since it has been called out as a ponzi scheme for years and still maintains the peg, these articles start to be more like advertisements for it.

And it seems unlikely that Ethereum's 100X rise in 2017 had nothing to do with the ICO boom.

I also find it hard to believe that the whole cryptoboom of 2017 can be narrowed down to one dimensional Tether-Bitcoin analysis.

It's probably a combination of manipulation on an incredible scale and the media attention this surge caused. We all know multiple people who FOMO'ed into crypto and lost most of their money. So that surge definitely wasn't all manipulation, but I'm not at all surprised that manipulation was what triggered that madness.

That's probably true, but hardly unique for Bitcoin imo.

Most of the crypto market follows Bitcoin's price, at least roughly. If Bitcoin gets up 5%, Ether and other coins might rise 6,7,10%. If you look at the 30, 60 day, etc charts of BTC vs the others, it's quite clear. So the market following the Bitcoin part is plausible.

> Rather than demand from cash investors

Can't find how did they determine, that Tether was not bought with cash, so this statement is basically baseless.

The pattern of issuances to market make it highly unlikely.

Can you elaborate?

It's in the source material, but crudely it looks like tether issuances were used to prop up the market as it faltered, timed as they were. Either there was a remarkably, improbably prescient actor there, or it looks fishy as f*ck.

I don't understand, did they acquire dollars to back up those issuances, or not?

Probably not. Nobody knows the full story, but given that the pattern is one of responding to market movements rather than looking like money flowing in to a market from investors, it seems unlikely.

Further, given their outright lies about auditing and the recent admission that only 75% of tether is backed by cash or cash-like instruments, it looks a lot like a huge fraud to me.

Make your own mind up I guess, but if you're going to tell me "See, nobody actually knows!", then that's true. But we can analyse what looks likely, and what looks likely is that it's been issued out of thin air to prop up the market price of BTC and fleece market participants for the benefit of owners of the Tether corp and Bitfinex.

I guess we'll see more as the various lawsuits shake themselves out.

> Probably not.

That is not enough to support claims of the paper.

Yeah, it is, given they've done the analysis and reported on how likely it is.

If you have thorough refutation prepared, I suggest you publish. So far your argument appears to be "nuh uh"

People do "technical analysis" on a daily basis, only to be wrong 50% of times.

The paper is quite filled with terms unclear to a non-finance 3rd party, but here is what I gathered from reading it diagonally and your explanation:

Their only argument about Tether in question not being cash backed is that it is infused exactly at the moments when Bitcoin goes down, and that is "not consistent" with what investors generally do.

Well, duh. Maybe it is not consistent with investing in, for example, falling Microsoft stock after some scandal reveals malpractice. But in case of cryptocurrencies, which historically have been very volatile, it makes quite a bit of sense to buy on a downward turn.

I don't see any reasoning in the paper, assigning probabilities to their expectations for investor behavior versus the reality of Tether trading conditioned on both hypothesis. And that assumption is the cornerstone of the claim. 80% of the paper for whatever reason is spent proving an obvious fact, that large Tether infusions are causing the rise of cryptocurrency prices.

> People do "technical analysis" on a daily basis, only to be wrong 50% of times.

That's because 'technical analysis' of an irrational market, for the purposes of projecting price movements, is worthless.

That's not the same as retrospectively examining things that have occurred in the past.

> in case of cryptocurrencies, which historically have been very volatile, it makes quite a bit of sense to buy on a downward turn.

But not in huge monolithic chunks.

Look, you live in denial if you want, but it's been pointed out so many times that tether is dodgy as all hell (and they've more or less admitted it themselves too). We'll find out sooner or later what's gone on.

In the mean time, try not to bankrupt yourself.

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