SAN FRANCISCO — A concentrated campaign of price manipulation may have accounted for at least half of the increase in the price of bitcoin and other big cryptocurrencies last year, according to a paper released on Wednesday by an academic with a history of spotting fraud in financial markets.
The paper by John Griffin, a finance professor at the University of Texas, and Amin Shams, a graduate student, is likely to stoke a debate about how much of bitcoin’s skyrocketing gain last year was caused by the covert actions of a few big players, rather than real demand from investors.
Many industry players expressed concern at the time that the prices were being pushed up at least partly by activity at Bitfinex, one of the largest and least regulated exchanges in the industry. The exchange was subpoenaed by US regulators shortly after articles about the concerns appeared in The New York Times and other publications.
Griffin looked at the flow of digital tokens going in and out of Bitfinex and identified several distinct patterns that suggest that someone at the exchange successfully worked to push up prices when they sagged at other exchanges. To do that, the person used a secondary virtual currency, known as Tether, which was created and sold by the owners of Bitfinex, to buy up those other cryptocurrencies.
“There were obviously tremendous price increases last year, and this paper indicates that manipulation played a large part in those price increases,” Griffin said.
Bitfinex executives have denied in the past that the exchange was involved in any manipulation. The company did not respond to a request for comment this week.
The authors of the new 66-page paper do not have e-mails or documents that prove that Bitfinex knew about or was responsible for price manipulation. The researchers relied on the millions of transaction records captured on the public ledgers of all virtual currency transactions, known as the blockchain, to spot patterns.
In particular, Griffin and Shams examined the flow of Tether, a token that is supposed to be tied to the value of the dollar and that is issued exclusively by Bitfinex in large batches. They found that half of the increase in bitcoin’s price in 2017 could be traced to the hours immediately after Tether flowed to a handful of other exchanges, generally when the price was declining.
Other large virtual currencies that can be purchased with Tether, such as Ether and Zcash, rose even more quickly than bitcoin in those periods. The prices rose much more quickly on exchanges that accepted Tether than they did on those that did not, and the pattern ceased when Bitfinex stopped issuing new Tether this year, the authors found.
Sarah Meiklejohn, a professor at the University College London who pioneered this sort of pattern spotting, said the analysis in the new paper seemed sound after reviewing it this week.
Philip Gradwell, the chief economist at Chainalysis, a firm that analyses blockchain data, also said the study seemed credible. He cautioned that a full understanding of the patterns would require more analysis.
Griffin previously wrote research pointing to fraudulent behavior in several other financial markets, drawing attention for a 2016 paper that suggested that a popular financial contract tied to the volatility in financial markets, known as the VIX, was being manipulated. A whistleblower later came forward to confirm those suspicions, and now several active lawsuits are focused on the allegations.