NYT: Worries Grow That Bitcoin Price Being Propped Up

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Published on:
Feb/01/2018

The headline rang out late Wednesday night from the New York Times: Fears over Bitcoin's price being propped up and what this might mean for the cryptocurrency space.

The Times report directly cites an exchange it says has a "checkered past of hacks and opaque business practice”, Bitfinex.

The news first reported Tuesday that Bitfinex was subpoenaed by the Commodity Futures Trading Commission, a United States regulatory agency led to a selloff on Wednesday.

From the New York Times report:

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.”

The price of Bitcoin has witnessed a sharp decline of 8% since last week, hovering right around the $10,000 mark heading into Thursday morning.  The price is down a whopping 925%, or nearly 9,000, from a December 17 peak of nearly $20,000.

It is not yet clear what information the regulators are seeking, the Times report indicates. Bitfinex has not commented on the subpoena or recent reports about Tether.

Last week, Bitfinex cut ties with a firm brought on to audit its finances.

“It’s a signal to the market of what those who have scrutinized the situation already believe: There is a problem here,” said Jill Carlson, a former trader at Goldman Sachs who now consults with a variety of virtual currency companies. “The dissolution of a relationship between an auditor and a company is very rarely a good sign that the company is behaving in accordance with market best practices.”

The Tether currency has been valuable to traders because it allows them to hold a stable token, tied to the value of the dollar, and move it quickly between virtual currency exchanges, the Times report noted.

- Aaron Goldstein, Gambling911.com

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