The dark secret behind Bitcoin’s price
When we see the price of one Bitcoin (BTC), we are easily chocked. How could a single BTC cost that much ? Even if Bitcoin is a revolution, such an increase in rate brings some questions. For instance, is the price of Bitcoin (or other cryptocurrencies) is only driven by demand or is there something else ? In other words, is there some (many?) internal or external entities influencing the price for their own benefit.
Bitcoin showed great promises from the start : a decentralized cryptocurrency with transparency and security, free from banks and governments. Quite appealing to say the least and it found echoes in many people. More than $1 trillion (> 1000 billion dollars) worth of cryptocurrencies have been created from the start.
This promised land of innovation and financial gains attracted (excessive?)speculation. For most people, the belief is to obtain a rapid gain from simply selling the asset to another speculator. Or hold to it until “it goes to the moon”, which is kind of the same with a longer time spectrum.
This periods of extreme price increases are usually followed up by an implosion. This phenomenon is called “Bubbles”.
I don’t know if there is a bubble in the crypto-market or not. To be frank, i suppose nobody does. 😇 The point of this whole reflexion is to find if there is any form of information that could orient us in the right direction.
Large entities have gained some centralized control
It’ quite ironic in the crypto- ecosystem but when you look closely it seems that :
- Centralized exchanges such has Bitfinex, Binance, Kraken, Coinbase, etc. conduct the vast majority of transactions.
- Stable coin issuers, mainly represented by Tether, control the supply a money (like a Central bank with no regulation) and can use it to fuel the exchanges.
- With this stable coins, the exchange don’t have to maintain good relationship with traditional fiat banking anymore.
- These centralized entities operate outside the purview of financial regulators while offering limited transparency. Which, i give you that, is generally useless in a decentralized system.
Let’s focus on Tether
Tether is today the main mean of acquiring Bitcoin today. As you can see in the pictures bellow, in major exchanges, around 50% of Bitcoins is bought in exchange of USDT.
And more than the 75% if you consider only fiat currencies and stable coins.
Considering this massive usage, Shams and Griffin wanted to find evidences to know if Tether is “pulled” (demand-driven), or “pushed” (supply-driven).
They research the flow of Tether among major market participants on the Tether blockchain from its conception in October 6, 2014 until March 31, 2018. They summarize it in the followed up figure :
- Node’s size is proportional to the sum of coin inflow and outflow to each node,
- The thickness of the lines is proportional to the size of flows
- All flow movements are clockwise.
You can see that :
- Most of the Tether flows to and from Bitfinex through Bittrex and Poloniex. Then is being slowly distributed to other Tether-based exchanges.
- Almost no Tether returns to the Tether issuer to be redeemed for US dollars.
The authors also found: “That following periods of negative Bitcoin returns, Tether flows from Bitfinex to Poloniex and Bittrex, and in exchange, Bitcoin is sent back to Bitfinex. Second, when there are positive net hourly flows from Bitfinex to Poloniex and Bittrex, Bitcoin prices move up over the next three hours, resulting in predictably high Bitcoin returns” Shams and Griffin
The patterns suggest that either one large player acquired Bitcoin purchasing Tether with cash at Bitfinex or Tether being printed without cash backup and pushed out through Bitfinex in exchange for Bitcoin. Probably the latter, to know why go there.
Correlation Between Bitcoin’s Price and Tether
Notice how Bitcoin seems to rise during times when Tether is printing. For exemple during the 5 first month of 2021. And after this period, they stopped: followed some market corrections.
They seem correlated to said the least but that doesn’t mean we know for sure that they are. Considering the previous arguments it seems suspicious at best. 😉
You can see the graph for yourselves here
It’s logical : if money (fiats or stable coins) flows to an asset, the price is inflated and goes up.
So what to think ?
In my humble opinion, the truth is probably a mix of the demand-driven theory and the allegations of price manipulation by Tether. This manipulation sure have effects on the price of cryptos.
But to let you think for yourself, i will sum up the key points of this article
- Considering that Tether and Bitfinex are controlled by a same entity, the were probably some temptation to use their insight for profit. And more of a temptation if you look at Sham and Griffin’s paper
- When Tether is printing, the price of Bitcoin seems to go up.
- The actors of the ecosystem are mainly centralized (Exchanges, stable coins issuers) without a high level of transparency.
Thank you for reading!
This article took me some time. If you enjoyed reading it, please take a few seconds to “clap” my article, and subscribe to my Medium page if you want more content.
Each user can clap an article up to 50 times per day! If everyone reading this clapped it 50 times, we would show up oftener and raise more awareness.
See you soon!
Kind regards
Guillaume
