The findings by Dr. Wang Chun Wei, a lecturer at the business school of Australia's University of Queensland, contradict widespread and long-running speculation that Tether, the company behind the stable cryptocurrency, has been issuing USDT to pump up the price of bitcoin.
Wei's findings have been accepted for the October 2018 issue of Economics Letters. (The paper was originally published online in May.)
In the paper, "The Impact of Tether Grants on Bitcoin," he writes:
"Our findings show that tether grants were potentially timed to follow bitcoin downturns and subsequent bitcoin/tether trading volumes increased ... However, the impact of tether grants on bitcoin returns were not statistically significant, and therefore tether issuances cannot be an effective tool for moving bitcoin prices."
Tether is the market's leading stablecoin. It maintains a steady price of about $1, ostensibly by backing each USDT with one U.S. dollar in reserve – though this claim is often disputed and hard to verify since Tether has not published a full audit. While the token has been valuable to exchanges, at least one top-20 exchange has recently moved to shift to a new alternative.
Wei's research focuses on the volume of USDT in the market and changes to that volume. It does not address controversies around the amount of U.S. dollars actually backing USDT.
"This is for regulators and auditors to determine," Wei writes.
Instead, the paper simply addresses whether or not the issuance of new USDT could be used to manipulate the price of the world's largest cryptocurrency. That critique of USDT has been articulated by the anonymous author of January's "The Tether Report," who wrote:
"The highly correlated growth between tether issuance and bitcoin price raises several interesting questions: Is bitcoin growth driving Tether? Is tether issuance driving bitcoin? If one were to assume the worst case scenario, that bitcoin's price has been artificially pumped up by tether issuance, one would expect the market price of bitcoin to be closer to $2,000 based on the trendline before April 2017 and the marked growth in tether issuance."
Tether Limited issues new USDT periodically in large lots typically referred to as grants. According to Wei: "The grants seem to occur in groups. I think Tether Limited breaks the grants into smaller blocks and issues them out over a couple of days."
Wei summarized the critique of Tether Limited's detractors for CoinDesk, writing:
"If tether tokens were not fully backed, then for the company to issue new tokens would be equivalent of printing money. If this was true, tether grants/issuances would be equivalent to 'monetary easing' in the cryptocurrency markets."
In monetary or quantitative easing, an increased money supply aims to boost economic activity by expanding liquidity.
"It was argued that most of the increased Tether was used to purchase bitcoin," Wei explained. "My paper tries to test this theory out empirically. Is it true that tether grants pushed up bitcoin prices?"
No pump found
The paper notes that bitcoin-tether trading pairs dominate across major exchanges and that more than $2 billion worth of USDT exists on the market. Further, it notes that trading in bitcoin does increase following new USDT grants. Nevertheless, that observation can be misleading.
Acknowledging that trading volume is correlated with price, Wei went on to say: "However, you cannot use trading volume to predict price, as the effect is simultaneous. In my paper, I state that past trading volumes do not impact future returns."
To investigate these questions, Wei used two time-series models to input different variables over time and see if there was a causal relationship. The models specifically looked for evidence of changes going forward from new grants.
He uses an "autoregressive distributed lag" model and also an "unrestricted vector autoregression" (VAR). Both of these are ways of investigating whether or not there is a causal relationship between something in the past and something in the future.
Wei broke it down in layman's terms: "We have a null model that tries to explain bitcoin returns using past bitcoin returns. We have a full model that tries to explain bitcoin returns using past bitcoin returns and past tether grants."
"We then show the full model isn't actually any better than the null model. Hence, past tether grants must have no impact on bitcoin returns."
In other words, when you add variables about USDT, it doesn't show any direct impact on BTC returns any better than just looking at BTC on its own.
"In fact, when we examine the bitcoin return equation of our VAR model, none of the lagged variables impacts bitcoin returns. This suggests bitcoin returns are showing greater signs of market efficiency than previously studied on older datasets," Wei writes in the paper.
Wei went on to argue that this makes intuitive sense, once the size of the bitcoin market is considered.
"The grants come roughly at $100-250 million blocks. The daily trading volume of bitcoin is roughly $5-10 billion USD. At its peak, it was roughly $20 billion," he told CoinDesk. "So the impact of tether is small. Claims saying that it is tether that props up bitcoin are definitely not true."
Prices on screen image via Shutterstock