The author: John M. Griffin & Amin Shams
Translation optimization: New Bloc hedge fund Yuting
Summary:
The purpose of this paper is to study whether USDT, which is known to be anchored to the US dollar, affected the price of Bitcoin and other cryptocurrencies in the 2017 bull market. We analyzed the blockchain data based on the algorithm and found that when the market was down, the use of USDT to buy bitcoin eventually led to a significant increase in the price of bitcoin.
Innovation, excessive speculation and suspicious behavior are always closely related. A bubble refers to the rapid increase in prices over a period of concentration, which is associated with a legal invention, technology or opportunity.
However, things must be reversed.
In particular, financial bubbles often occur at the same time as people’s simple belief that you can get rich overnight by selling assets to other speculators. This may be due to focusing on speculation without focusing on verifiable fundamentals. Various forms of misinformation are associated with scams.
For example, in the Mississippi bubble incident from 1719 to 1720, promoters participated in the false market propaganda about the potential of income-generating assets. They advertised that prices were backed by stocks and that the distribution of paper gold was not as advertised. All are supported by gold reserves. A large amount of evidence shows that the railroad bubble of the 1840s, the stock market boom of the 1920s, the Internet (dot-com) boom, and the 2008 financial crisis are all well-designed false Financial situation, price manipulation, collusion and scams.
In this study, we examined the impact of the largest stable currency USDT on the price of Bitcoin and other cryptocurrencies. USDT, in principle, should have 100% of the US dollar deposit as a guarantee, which can be used as US dollars for transactions without the involvement of banks.
In a period of time, the trading volume of USDT and Bitcoin is greater than that of USD and Bitcoin, and it is also unmatched by other currencies. Although USDT is described as a scam in many blogs and media, cryptocurrency exchanges still ignore these questions and widely promote USDT in transactions.
In just a few years, Bitcoin has gone from being almost worthless to having a market value of more than 500 billion U.S. dollars, which is very consistent with the characteristics of the bubble we mentioned earlier-speculation and technological innovation. In the past, Bitcoin and other cryptocurrencies promised anonymity and freedom from government and bank intervention, and they were followed by many investors.
The idea of Bitcoin was affected by the 2008 financial crisis-investors hated government intervention and distrusted mainstream major banks. The promise of decentralized bookkeeping with independently verifiable transactions is extremely attractive, especially in an era of external hackers and internal manipulation.
The irony is that new large entities have gained centralized control of most operations in the cryptocurrency field, such as centralized exchanges that handle most transactions, and institutions that can control the issuance of stablecoins like the central bank. .
These centralized entities are largely outside the jurisdiction of financial regulators and provide varying degrees of limited transparency. In addition, the operation of illegal currency based on digital stable currency has further relaxed the need for these entities to establish legal currency banking relationships. Trading on unregulated exchanges, especially on cross-digital currency exchanges, may make cryptocurrencies vulnerable to gambling and manipulation.
In this research, we studied the impact of USDT on the price of Bitcoin and other cryptocurrencies. The Bitcoin transaction volume conducted with USDT in a period of time is more than the U.S. dollar and Bitcoin transaction volume. USDT is said to be backed by U.S. dollar reserves, and can conduct transactions similar to U.S. dollars without being related to banks. These features are not available in other currencies.
Although some media reports and expressed their doubts about the authenticity of the USD reserves behind USDT, in fact, cryptocurrency exchanges do not recognize these and continue to support the use of USDT for trading.
We started our research by collecting and analyzing the blockchain data of USDT and Bitcoin, and then using a series of algorithms to reduce the complexity of the data. Due to the translucency of the transaction history recorded on the blockchain, we can use various algorithms developed in computer science to group related Bitcoin wallets. Then, mark large clusters by identifying certain member wallets in each group and tracking the currency flow between the major market participants.
The figure below plots the total flow of USDT between major market participants on the USDT network from October 6, 2014 to March 31, 2018. The size of the node is the sum of the inflow and outflow of coins at each node. The thickness of these lines is proportional to the size of the flow, and all flows move in a clockwise direction.
Tether (the name behind USDT) has been authorized to move its USDT to Bitfinex, and then slowly distribute it to other Tether-supporting exchanges, mainly Poloniex and Bittrex. At the same time, the graph shows that Tether that has hardly gone out will be returned to Tether for issuance
Figure: The collective flow of USDT on the main address
Bubble, Bitcoin and USDT overview and assumptions
A. The prevalence of speculative bubbles and suspicious market activities
One way of thinking is that there are many frauds in the economic boom, because individuals have relatively little monitoring of investment, and historical participants who participated in “robbing” organizations (such as banks in the US savings and loan crisis) systematically increased asset prices, Transfer of capital to another place. In our analysis of Bitcoin and USDT, we were able to check whether any of these two views fit the data.
B. A brief history of Bitcoin and exchanges being hacked
On October 31, 2008, Satoshi Nakamoto released the Bitcoin white paper “Bitcoin: Peer-to-Peer Electronic Cash System”. The white paper exemplifies a digital currency system in which transactions are recorded on a chain of connected blocks, that is, “blockchain”, and then electronically authenticated by decentralized network users.
The former Bitcoin exchange Mt. Gox, before 2013, processed 70% of the Bitcoin transaction volume. However, it was declared bankrupt due to a secret attack by hackers, which eventually resulted in approximately USD 450 million worth of Bitcoin in its platform user accounts. Miraculous evaporation.
C. A Brief History of USDT
The goal of USDT was to promote cryptocurrency to anchor the U.S. dollar at a fixed exchange rate, although this may also happen in legal transactions, and many cryptocurrency exchanges maintain relationships with banks. Tether’s issuer, Tether Limited, once claimed: “The Tether platform currency is 100% backed by the actual legal currency assets in our reserve account.” However, Tether later proposed that they do not guarantee redemption rights, and this statement gave rise to self-confidence. Contradictory ambiguity.
Chart A below shows the USDT accumulative authorization and Bitcoin price denominated in U.S. dollars and Bitcoin, while chart B shows the comparison between transactions denominated in U.S. dollars and transactions denominated in USDT for mainstream cryptocurrencies.
D. Main assumptions
This part verifies the two “push” and “pull” hypotheses about USDT. Under the first assumption, USDT is driven by the legitimate needs of investors, who use USDT as a medium of exchange to transfer their legal currency assets into encrypted assets.
In this case, the price impact of USDT reflects natural market demand. Under the second hypothesis, Tether was “pushed out” through a supply-driven scheme in which unsupported digital dollars were printed and used to buy Bitcoin. In this case, the additional supply of USDT may cause the price of Bitcoin and other cryptocurrencies to rise, and this is not due to real capital flows.
Related to the “pull” hypothesis, we first predicted that Tether will be driven by investor demand and supported by the US dollar.
Chart: USDT authorization and Bitcoin price over time, as well as USD and USDT trading volume. Figure A plots Tether’s cumulative authorizations and the price of Bitcoin over time. The red dotted line shows the cumulative authorization of millions of Tether tokens. The black dotted line shows the accumulated authorization of Tether denominated in Bitcoin prices during the same period. The blue line shows the Bitcoin price. Authorization is defined as a transaction with the transaction type “Grant Property Tokens” on the Tether blockchain. Panel B shows the percentage of U.S. dollar and tethered trading volume for major cryptocurrencies from March 1, 2017 to March 31, 2018 on all exchanges.
Dynamics of data, algorithms and main accounts
A. Data
The price and blockchain data for this study were obtained from dozens of sources, and the files exceeded 200 GB. The main sources are CoinAPI, Coinmarketcap.com, Blockchain.info, Omniexplorer.info and CoinDesk. The intraday price data of mainstream cryptocurrencies is obtained from CoinAPI. Different currencies have different start times. The sample spanned 25 months from March 2016 to March 2018, but the most important test was implemented after Tether was issued in March 2017.
B. Analyze the Bitcoin blockchain
In order to reduce the complexity, we use the computer literature method. The idea is that when multiple addresses are used as a single transaction input, the entity controlling each input must have the privacy signature keys of all other inputs. Therefore, it is likely that all these addresses are controlled by the same entity. For example, if wallet A and wallet B are used as inputs in a single transaction, and wallets B and C are used as inputs in another transaction, we divide wallets A, B, and C into a group
In the entire Bitcoin blockchain, we have discovered the connected components of this “same input” relationship, and treat each component as a set of wallet entities controlled by the same input, and then perform the other three steps: first, if A transaction has multiple receivers, so the traffic from the sender will be proportionally distributed according to the number of coins received by each receiver. Secondly, for each transaction, we exclude the same part of the coin input and output wallet. Finally, we exclude transaction fees that reflect the difference in the total amount of Bitcoin sent and received in a transaction.
C. Bitcoin and USDT net flow
The flow of funds between Bitcoin and USDT on the blockchain can also be referred to as the transfer of net capital between the two. Specifically, our test needs to record the token flow between the major USDT exchanges Bitfinex (BFX), Poloniex (PLX) and Bittrex (BTX) during the sample selection period. For Bitcoin, we only need to add up the number of net tokens transferred in each period between these exchanges:
BTCi → j is the number of tokens transferred from wallet group i to wallet group j from time t-1 to t. For USDT, in order to measure the value relative to the price of Bitcoin, we use the price of Bitcoin at the time of the transaction to accumulate the value of USDT denominated in Bitcoin. Similar to the flow of Bitcoin, we define the net flow of USDT as:
Tetheri → j is the number of tokens transferred from exchange i to exchange j from t-1 to t.
The size of the token flow on the two blockchains is very matched, and the correlation between the two flows is very high, but considering the different delays of moving coins to exchanges and clearing transactions on the blockchain, the time is not complete match. Considering that the time of the blockchain transaction is the agent of actual capital flow, in order to reduce our interference in the measurement of Bitfinex’s Tether net flow and Bitcoin’s net return, we averaged the two flows on the Bitcoin and Tether blockchains :
Conclusion of this article
Historically, the period of rapid price increases was related to innovation and growth, but also to improper activities that led to improper capital allocation. The translucent nature of the blockchain provides a unique opportunity to study the mechanisms behind the growth of asset classes during mass speculation and to understand the role of central currency entities in the cryptocurrency world.
In this article, we examine whether the growth of Tether, the largest stablecoin in the crypto world, is mainly driven by investor demand or whether it is provided to investors as part of a plan to raise cryptocurrency prices.
By drawing the blockchain diagram of Bitcoin and Tether, we can determine that the price of Tether has fallen after the issuance of Tether, and a large player on Bitfinex used Tether to buy a large amount of Bitcoin. As the price of Bitcoin rises after intervening expectations, this price support is successful.
In fact, even 1% of the time, extreme trading of Bitcoin and USDT will have a huge total price effect. Under the integer price threshold where price support may be the most effective, buying Bitcoin with USDT is also more intense. With the significant increase in the issuance of Tether, Bitcoin is facing negative EOM price pressure for several months, which indicates that Tether needs to be reserved for USD at the end of the month, which is consistent with the partial reserve support.
In general, our research results support the view that price manipulation can have a substantial distorting effect on cryptocurrencies. The price in this market reflects far more than standard supply and demand and basic news. Once these distortion effects are removed, it may have a considerable negative impact on the price of cryptocurrencies.
More broadly, these findings also show that innovative technologies designed to bypass traditional banking systems have not eliminated the need for external supervision, monitoring, and regulatory frameworks, as many in the cryptocurrency space believe. Our research
