Bitcoin (BTC US) and other cryptocurrencies had a parabolic increase in 2017. The price increased from around $1000 to closer to $20,000. This massive price appreciation led a lot of market participants and cryptocurrency investors believing in a dawn of a new day. Hoping and expecting of continued rise in cryptos. Unfortunately for them Bitcoin and rest of the cryptos have lost the majority of their value in 2018. Bitcoin dropping from closer to $20,000 to around $4,500.
Source: Yahoo Finance
It now appears that the majority of the price increase in 2017 could be due to price manipulation. The Department of Justice has started a criminal probe investigating this. The Information writes;
An investigation by federal prosecutors into whether bitcoin’s rise last year was fueled in part by market manipulation has homed in on the crypto exchange Bitfinex and Tether, a company that is run by the same management team as Bitfinex.
The probe is investigating whether the massive price increases were due to actual demand or by various forms of price manipulation. Tether is extensively used by various traders to trade on other cryptocurrencies. Traders like to use Tether as it is more stable cryptocurrency. Bloomberg notes;
Tether’s stability and its name come from the fact that its value is supposed to be tethered to the U.S. dollar. Tether Ltd. even says that for each digital coin issued, it has $1 in the bank.
Some market participants have had doubts about Bitfinex actually having USD backing up their claims. The U.S. regulator CFTC subpoenaed Bitfinex to found out more.
The price manipulation claim has its origination from a paper by University of Texas Finance professor Griffin. In the paper, Professor Griffin found that Tether was used to buy Bitcoin at various significant moments when Bitcoin prices were declining. This helped stabilize the price. CNBC explains further;
Tether was used to buy bitcoin after large price falls. The authors tracked that pattern and found periods of suspicious bitcoin price activity tied to the issuance of Tether, which is purportedly pegged to the value of the U.S. dollar.
Griffin found that about 87 hours, or about 1 per cent, of heavy tether trading, could explain 50 per cent of the rise of bitcoin and around 64 per cent of the rise of other major cryptocurrencies
If the claims are true about the massive decline in 2018, it could mean a severe blow to Bitcoin and other cryptocurrencies. This could hamper their usage and implementation.
Furthermore, another U.S. regulator SEC has started to more actively policing various ICOs that have been issued. The regulator announced it had settled charges again two companies that sold digital tokens. SEC stated in their press release;
These are the Commission’s first cases imposing civil penalties solely for ICO securities offering registration violations… Neither Airfox nor Paragon registered their ICOs pursuant to the federal securities laws, nor did they qualify for an exemption to the registration requirements.
Most companies that have issued an ICO have done it same fashion as Airfox and Paragon. This means that they will be forced to refund their clients investments. This, in turn, means that they most likely would have to sell their ICOs to generate dollars. Subsequently, it could result in further price pressure on various cryptocurrencies.
With all this said, these actions could be either be interpreted as a nascent market growing up. Proper rules and regulation starting come into place. On the other hand, others might argue, these latest actions and news point towards significant issues with cryptocurrencies. As an investor and trader into cryptocurrencies, one should keep on monitoring the developments as they could provide interesting opportunities as things become clearer and the dust settles.
