UPS AND DOWNS

Tether, not Libra, may be the cryptocurrency behind bitcoin’s surge

Hot off the press.
Hot off the press.
Image: Reuters/Gary Cameron
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Contrary to popular belief, Facebook’s planned cryptocurrency, Libra, probably isn’t the only thing behind bitcoin’s recent resurgence.

Although crypto speculation surely increased after the social media giant’s announcement, bitcoin’s recent rise might also have something to do with another digital token, Tether, a US dollar-pegged unit commonly used to trade bitcoin on exchanges that lack banking partners. Tether is issued and redeemed by a company of the same name.

In the past few weeks, bitcoin has nearly doubled in price, jumping from $7,000 to more than $13,000. At the time of writing, the exuberance has tapered off somewhat, with the cryptocurrency trading around $11,700. At the beginning of the year, bitcoin traded for just under $4,000.

Bitcoin’s recent rise appears to coincide with the creation of new Tether tokens. The market cap for the token, called USDT, has similarly grown in recent weeks. Some crypto analysts suspect Tether (the company) is creating USDT not fully backed by dollars and using it to buy bitcoin, driving up its price, through Bitfinex, an affiliate exchange. (The companies deny this.)

Both Tether and Bitfinex are subsidiaries of iFinex, which has struggled to find banks willing to take its business; iFinex did not respond to a request for comment.

Tether was linked to bitcoin price manipulation last June in a paper by researchers at the University of Texas. In April, The New York attorney general’s office announced that it was investigating iFinex for fraud.

Also in April, Tether’s attorney revealed that USDT tokens are only backed 74% by reserves. In other words, the digital tokens, which are meant to be worth $1 apiece, would have only $0.74 of redeemable value if all were converted at once.

Nouriel Roubini, an NYU economist and longtime bitcoin skeptic, mentioned Tether as one factor in what he called “crypto b/s.” He pointed to the University of Texas study suggesting that 95% of bitcoin volume is fabricated, meaning that a person—or group—trades tokens between themselves. Others in the crypto community echoed Roubini’s doubts, including Nicholas Weaver, a networking researcher at the University of California at Berkeley:

The bitcoin market can sometimes feel chaotic and incomprehensible, but there are often fundamental drivers behind the cryptocurrency’s price. This week, Libra is clearly a factor—but Tether may be the one worth scrutinizing.