Worries Grow That the Price of Bitcoin Is Being Propped Up

Worries Grow That the Price of Bitcoin Is Being Propped Up, by Nathaniel Popper.

A growing number of virtual currency investors are worried that the prices of Bitcoin and other digital tokens have been artificially propped up by a widely used exchange called Bitfinex, which has a checkered history of hacks and opaque business practices.

In December, Bitfinex was subpoenaed by the Commodity Futures Trading Commission, a United States regulatory agency. …

The people behind Bitfinex issue a virtual currency called Tether. Unlike most digitals tokens, every Tether is supposed to be backed by traditional money — the United States dollar. New Tether tokens are issued when investors give them dollars. One dollar is worth one token.

Because of the credibility that comes with that tie to the dollar, Tether are often used to buy other virtual currencies like Bitcoin.

In recent months, however, many investors have been raising alarm bells about Tether. Hundreds of millions of dollars worth of new Tether were created; almost always when the prices of other virtual currencies were heading down. The Tether were used on the Bitfinex exchange to make big purchases of Bitcoin and other tokens, helping push their prices back up, according to multiple analyses of data from Bitfinex.

“This became more and more concerning, because every time the markets went down, you have seen the same thing happen,” said Joey Krug, the co-chief investment officer at Pantera Capital, which runs several virtual currency hedge funds. “It could mean that a lot of the rally over December and January might not have been real.” …

Bitfinex … is believed to host more trading than any other Bitcoin exchange in the world. …

“This absolutely reeks of price manipulation,” a security researcher and market analyst, Tony Arcieri, wrote on his blog in mid-January.

Many investors and traders have pushed back against that criticism, noting that smart traders simply may be looking to buy when the markets are down. …

The Bitcoin community is sensitive to the possibility of price manipulation because a team of academics published an article in early January suggesting that the price of Bitcoin was artificially inflated in 2013 by a single player operating on the largest exchange at the time, Mt. Gox. [The price of Bitcoin jumped seven-fold].

Bitcoin is not a fraud. It is a solution to the genuine problem of a non-government currency that can be sent over the Internet. But it is especially vulnerable to pump-and-dump’s because there is no intrinsic method for valuing it. (Most investments produce an income stream — which has a net present value under assumptions of future interest rates. A government currency is valued by parity purchasing power, the interest rates available in the currency, and the rate at which it inflates. Like bitcoin, gold is tricky to value — but has a huge history to draw on.)