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So, Have We Got Tethered?



Oleksandr Ivanov (aka cryptofan) is a crypto analyst, data scientist, and PhD candidate at University of Groningen. In his short research he applies the critical analysis of recent accusations that Tether supply has been manipulated in order to use pump-and-dump scheme on the price of Bitcoin.

Over the 2017 year the price of bitcoin skyrocketed.

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So did the amount (equals to the market cap) of tethers (USDT).

Some people made a causation link between these two. Briefly speaking, here is the plot:

  1. Bitfinex (a cryptocurrency exchange and the owner of Tether) prints millions of tethers out of thin air.
  2. Uses tethers to pump the price of bitcoin with margin long trading.
  3. Dumps bitcoins for US dollars.

For more detailed explanations see here and here for example.

At some point the discussion whether or not Tether influences the price of bitcoin became one of the hottest topics in crypto community. Some people, like the person behind the twitter account Bitfinex’ed, actually made a name by speculating on this question.

So have we all got tethered? I approached this question from a statistical point of view. If the alleged Tether strategy is true, we should see a positive correlation between the change of the amount of tethers and the change of bitcoin price at some timeframes.

First, from the Coinmarketcap website I took the historical data of bitcoin price and the amount of tethers in 2017. Then I calculated the daily percentage change of bitcoin price:

and the daily change of Tether‘s market cap (the amount of tethers):

Clearly, Tether had some rock days, when the amount increased over 40% in one day.
Next, I plot the bitcoin daily percentage change in price versus the amount of tethers daily percentage change. Most of the points center around zero. Some points on the far right corner of the plot correspond to large percentage changes in the amount of tethers. These are the outliers. Interestingly, they mostly lie below zero in the bitcoin price percentage change axis.

Pearson correlation coefficient for bitcoin daily price percentage change and the amount of tethers daily percentage change is -0.17168 (p-value is 0.001, which is statistically significant). So there is a negative correlation between the change of the amount of tethers and the change of bitcoin price. Visual inspection of the plot about indicates that tether outlier points may have a strong influence on the correlation. Removing tether outliers (daily change of market cap > 20%) leads to the correlation coefficient of -0.08335 (p-value is 0.1159, which is not significant).

A valid argument is, what if tether is not used to pump bitcoin price immediately but after some time? We can statistically verify that by calculating the percentage change of bitcoin price for some number of days with a sliding window. This is similar to the moving average, but instead of the average, the percentage change is calculated between the first and the last day in the moving window. By varying window size in days I can calculate if the change of the amount of tethers correlates with bitcoin price within some number of days (I call it a lag). Here is the result (without removing tether outliers):

The correlation in all cases is still close to zero. In conclusion, this simple statistical test does not support the hypothesis that the creation of new tethers pumps the bitcoin price.

How come that the Tether controversy became such a hot topic in the bitcoin community? Let me speculate myself here. I personally attribute this to the confirmation bias. As soon as new tethers are created and the price of bitcoin within a short period of time goes up, people that believe in tether conspiracy theory present such an event in support of their theory. Whenever there are new tethers created and bitcoin price does not move or goes down nobody bothers to talk about this. In the same way, we know about almost every single airplane crash event and about very small percentage of car accidents events. It is much more safe to fly than to drive a car but people are generally more afraid of flying than driving in a car.

My analysis does not generally disprove that there are no manipulations with Tether. However, in that case, the plot may not be so simple as I outlined at the beginning of the article. Transparent public audit of Tether will shed the light on this issue.



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