Contrary to the somewhat-popular idea that tether (USDT) issuance is used to manipulate crypto markets by boosting the price of bitcoin, a new academic study by researcher Wang Chun Wei of the University of Queensland Business School shows that the most widely-used stablecoin in fact has a negligible effect.
Tether and the 2017 Bitcoin Price Rally
Titled “The Impact of Tether Grants on Bitcoin,” the report examines the tether-bitcoin price manipulation theory using a Value-at-Risk (VAR) model to establish conclusively that while there is a positive correlation between USDT grants and bitcoin’s trading volume, this does not lead to any significant bitcoin price movement.
In July, researchers from the University of Texas claimed that market manipulators used Tether’s USDT token to artificially inflate the bitcoin price during its prolonged 2017 bull run. In the 66-page report, Professors John Griffin and Amin Shams argued that tether has been repeatedly used to provide price support for bitcoin during market downturns.
Using the VAR model however, the new study debunks these claims, stating that no empirical evidence could be found to support claims of a positive correlation between USDT grants and the 2017 bitcoin price rally.
An excerpt from the report reads:
“We find no empirical evidence supporting the notion that Tether grants cause subsequent Bitcoin returns to rise on a daily basis. In fact, when we examine the Bitcoin return equation of our VAR model, none of the lagged variables, impacts Bitcoin returns. This suggest Bitcoin returns are showing greater signs of market efficiency than previously studied on older datasets.”
The report does, however, find evidence of a positive correlation between issuance of USDT tokens and increased cryptocurrency trading the following day. The study’s estimates show that in the aftermath of a tether grant, both bitcoin and tether experience increased trading volumes. The researchers are quick to point out that trading volume spikes do not directly lead to bitcoin price increases; moreover, the effect on trading volumes is temporary, and volume generally returns to normal within five days.
This would seem to indicate that, after Tether issues new tokens, investors could be purchasing bitcoin and other coins with USDT, but in terms of net effect, the size of the grants is not large enough to create any kind of significant price manipulation effect in the bitcoin market.
The study also found that tether grants are autocorrelated, indicating that Tether deliberately breaks large grants into smaller blocks for issuance over several days, so as to minimise price impact on crypto exchanges. Even more significantly, the study found evidence to suggest that USDT trading volumes increase following downward bitcoin price movements, which could be a result of investors keeping their holdings in stablecoins during bearish periods.
The spike in USDT issuances around this period could thus be a result of Tether responding to increased demand by launching new grants rather than an attempt to shore up bitcoin’s support levels by purchasing it with newly-minted USDT.