Could This Be The Reason For Bitcoin's Massive Sell-Off?

Amid what has been a hair-raising few days throughout the global stock market, traders focused on cryptocurrencies have had an even-rougher stretch. On the back of significant slumps in bellwether assets like bitcoin, the total market capitalization of cryptos has fallen off a cliff over the past few weeks, causing concern in even the most-grizzled investors.

According to CoinMarketCap.com, the price of bitcoin fell more than 13% to touch just below $7,500 on Monday morning. Several other popular cryptocurrencies—including Ethereum, Ripple, Bitcoin Cash, and Litecoin—have also witnessed double-digit losses over the past 24 hours.

Bitcoin has now shed more than 60% of its value since surging to roughly $20,000 at the beginning of 2018. The original and largest cryptocurrency typically takes the rest of the market with it, and as we can see from CoinMarketCap’s three-month chart, it has certainly been a wild ride:

Attempting to find one single reason for a surge or sell-off in bitcoin is nearly impossible. We know that fears of increased regulation in several key Asian markets—including China and South Korea—probably scared some investors. We can also assume that many long-time holders decided $20k was a great place to cash out their massive profits.

But there is another interesting thing going on in the cryptocurrency market that could explain some of the recent slump in bitcoin.

The phenomenon that we are hinting at here relates to a cryptotoken called Tether, a so-called “stablecoin” designed to maintain a stable value of one USD. Tether tokens are issued by a Hong Kong-based company that supposedly backs each new unit with a fresh dollar in its reserves.

This cryptotoken is sued to cash in and out of bitcoin faster, as traders can avoid the complicated process of converting currencies. Traders can also use Tether to price digital assets in USD without having USD-based bank accounts, which helps exchanges maintain financial relationships around the world.

The concern surrounding Tether is twofold. First, Tether’s parent company has never published an audit of its reserves to prove that it actually has the amount of USD that it claims to own. What’s more, Tether’s importance to trading props up the value of bitcoin—meaning that bitcoin’s price may have been determined under false pretenses.

A new anonymous research report dug into these potential issues through publicly available information. Commissioned by a group of investors called the 1000X Group, the report links sudden increases in bitcoin’s price to the arrival of newly-issued batches of Tether on a major exchange.

The author ultimately concludes that Tether could be responsible for nearly 40% of bitcoin’s current value. That could be a serious problem if Tether is actually fraudulent, which the author of the report argues.

“It is highly unlikely that Tether is growing through any organic business process, rather that they are printing in response to market conditions,” the author said in a summary.

Proving that Tether is actually backed by an equivalent number of dollars would require a third-party audit. The company did hire a New Jersey-based firm to conduct this audit, but that relationship has apparently dissolved in recent weeks.

Meanwhile, cryptocurrency skeptics will likely point to this story as further evidence that the market is fraught with deceit and uncertainty.

Want more analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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