Anyone observing the buy and sell values in the cryptocurrency world will have seen its volatile rise and fall. Specifically, over the span of time between November to now; with Bitcoin soaring from $20,000 to where it is now. From the outside looking in, it would be normal to just shrug this off as market volatility. An earlier study also showed that the reason for the fall was in part, due to its inclusion on the stock exchange.
The reason for this? It allowed investors who were otherwise sceptical of cryptocurrency world to buy into the market. This inclusion of sceptics may have taken the bitcoin down from its previous bullish trend. But while this is a plausible idea, newer research suggests that Tether had a role in bitcoin’s fall.
Bitcoin on a Tether?
In the confines of the study, Griffin and Shams [researchers on the project] liken cryptos to earlier investment bubbles. Comparing them to the South Sea Bubble (1719-20) and Housing Market collapse of 2008.
“Cryptocurrencies, which have grown from nearly nothing to over $300 billion in market capitalization in a few years, fit the historical narrative of previous bubbles quite well–there is an innovative technology with extreme speculation surrounding it.”
This study in particular analyses the relationship between bitcoin, other major cryptos and Tether. The latter being a cryptocurrency backed by the US dollar that makes up a massive level of trading volume compared to the dollar. But why is it linked to the inflation and subsequent deflation of the likes of bitcoin?
It’s important to understand the value of Tether. One of its practical purposes is being used for cross-party exchanges between fiat and crypto. It’s not an unpopular currency either; a lot of coin exchanges use it for this exact purpose. The theory put forward by this paper is that whenever Tether is ‘pushed’ or ‘pulled’: it causes bearish and bullish trends for cryptos.
Pushing and Pulling refers to both consumer and investor demand. Both of which can have a significant impact on exchanges.
“if Tether is ’pulled’ or demanded by investors who own fiat currency, the issuance of Tether facilitates the demand of these investors who value the flexibility of a digital currency and yet the stability of the dollar ’peg’. The demand for Tether could also arise because of its practicality for engaging in cross-exchange pricing arbitrage.”
“Alternatively, if Tether is ’pushed’ on market participants, Bitfinex supplies Tether regardless of the demand from investors with fiat currency to purchase Bitcoin and other cryptocurrencies. The acquired Bitcoins can then gradually be converted into dollars.”
What this means
It means that any time that bitcoin is purchased, whether it’s being ‘pushed’ or ‘pulled’, Tether is purchased as well. And either due to a vested interest from the latter or a desire from users to convert it to bitcoin artificially pushes up bitcoins value. Taken from theory to practice, this equated to a contribution of 50% to bitcoins overall bullish trend in December.
While this study demonstrates that there may be other, ulterior motives behind the increases to bitcoin. News sources such as Bloomberg remain sceptical of the study.