Over the past month, $600 million worth of “tethers,” a cryptocurrency supposedly pegged to the dollar, have been minted into existence. Seemingly in tandem, Bitcoin’s price has climbed up from $8,500 to $11,000. Are the two events connected?
Absolutely, said Will Harborne, the founder of the Ethfinex, a decentralized exchange that’s headquartered in London. Ethfinex is a subsidiary of Bitfinex, Tether’s sister exchange, and has insight into the relationship between tether, bitcoin, whales and bull markets.
In an interview with Decrypt, Harborne explained how the whole thing works.
Investors, he said, will preorder a large batch of tethers from Tether, the company that issues the stablecoin, days in advance. Tethers are useful to these large holders, who can trade them—paired to Bitcoin, Ether, Litecoin and other coins—on high-liquidity exchanges that don’t accept fiat currencies. Then they can redeem the tethers for cash.
This early communication between Tether and its investors, who must fork up a minimum of $100,000 to buy directly from the Tether website, is what generates the big round numbers seen in public issuances—say, last week’s $100 million, said Harborne. To respond to the “rough, projected demand” conveyed by these investors, Tether creates a batch of tethers, which requires key members sign off with their public keys; this takes time, and is the reason investors’ demands are aggregated into large batches.
Then, when the wires come through, Tether sells off the newly minted tethers to the pre-purchasers for a dollar a piece, and the buyers use them on the market to snap up Bitcoin, Litecoin, whatever.
The lay speculators see the price inch up, they pile in, and…number goes up.
“[Tether] essentially just ‘pre-creates’ the blockchain tokens based on a rough projected demand,” said Harborne. “Usually customers don’t just send $5 million without pre-notifying Tether. So tether can know it’s going to roughly need about [for example] $250 million over the next few days. But then once the money arrives via wire transfer the actual Tethers get sent to the customers.”
Take what happened over the last month. Per Etherscan, 600,000 tethers were minted between May 25 and June 25. At first, the coins were released slowly at the end of May, which coincided with a gradual increase in price. Then, three more large tranches of tethers were minted and released in rapid succession, coinciding with the parabolic leap in bitcoin’s price, from $8,500 to $10,000.
Some of these tethers, Harborne said, were actually just being migrated from the Bitcoin-based OMNI network to the Ethereum network, to match demand. But still, the correlation—and the research into the issuances—makes it clear; when tethers flood the market, the speculators tend to follow suit.
So what exactly is “rough projected demand?” Who’s buying, and how does Tether gauge it? According to Harborne, one of Tether’s biggest customers is over-the-counter trading desks, who privately sell large quantities to investors or large scale traders. “An OTC desk might do a large deal selling BTC to a large buyer in the US, and then will convert the dollars to Tether in order to spread the other side of the order across Bitfinex and Binance where there is more liquidity,” he said.
Alternatively, it could be traders looking to squeeze leveraged short-sellers on dedicated exchanges like BitMEX, where a sudden, upward surge in price will liquidate the traders’ positions and send cash straight to those betting against them—that is, the whales themselves. Or, perhaps the more recent investors grew excited by the prospect of Facebook’s Libra, and decided to cash in quick.
Some would call this close cooperation between Tether and its traders a form of market manipulation. “Nobody ‘buys’ tethers,” said pseudonymous blogger Bitfinex’ed, who has been investigating Tether for several years, in a DM to Decrypt. “Bitfinex [a large crypto exchange that operates as Tether’s affiliate] issues tethers to their traders for market manipulation, market manipulators pump and dump, then ‘pay’ for the tethers later.”
Harborne said that this was untrue, and that investors only receive fully backed tethers once they’ve forked up. The blogger Bitfinex’ed disputes this, saying that Tether’s failure to disclose the Buy orders from its customers amid the New York Attorney General’s ongoing investigation into Bitfinex—which was accused of borrowing from Tether’s supposedly “fully backed” reserves to cover up an $850 million hole in its finances—looks fishy.
“If it was [true], then Bitfinex would have been able to provide that documentation and avoid a lawsuit,” he said. “They would have been able to show, here, we issued 10,000,000 tethers to Mr.X, and here’s a 10,000,000 wire transfer from Mr.X just before we issued it.”
But they didn’t, Bitfinex’ed said.
Harborne demurred, and insisted that this sort of play, in which large investors telegraph their intentions to buy up enormous volumes of tethers, was neither exclusive to Tether, nor a form of market manipulation. He pointed out that the transparency of Tether’s blockchain simply lays bare the practice in broad daylight. Other exchanges, he said, receive similar inflows of cash as Tether does tethers; but these transfers, made in fiat currency, are concealed from prying eyes. Indeed, a large tether order might be a sign the other whales are mobilizing elsewhere.
As for why these investors tend to make large tether orders in one go, Harborne said it was more a matter of bull-run optimism than cynical market manipulation.
“Now that people think we are back in a bull market, they want to buy lots of bitcoin, and need to get funds onto exchanges,” he said. “I think the reality is that it would be incredibly hard to coordinate across that many people, and that overall market forces are stronger than any group of traders.”
It’s a “chicken and egg” scenario, he reckoned.
But this time, if you look closely enough, you can see which will come first.