There is a pretty cool new study that was just released on the impact of Tether issuances on the Bitcoin price. In fairness, the study is anonymous (the author was apparently trying to avoid being trolled by the Bitcoin believers). But the question is important, because Twitter is full of this sort of thing:

Entertainingly, the author was publicly challenged to swap Tether for US dollars after that. Which he initially agreed to do (at a substantial premium):

Then during the ‘put up’, he increased the premium:

There was some story about ‘counterparty’ risk – but the premium shift speaks for itself.

Although that’s only really a statement about the viability of Tether – not a statement about its impact on the price of Bitcoin. Which brings me to:

The summary of the key findings

I’ll just quote it for you:

• It is highly unlikely that Tether is growing through any organic business process, rather that they are printing in response to market conditions.
• Tether printing moves the market appreciably; 48.8% of BTC’s price rise in the period studied occurred in the two-hour periods following the arrival of 91 different Tether grants to the Bitfinex wallet.
• Bitfinex withdrawal/deposit statistics are unusual and would give rise to further scrutiny in a typical accounting environment.
• If there is questionable activity, the author believes a 30-80% reduction in BTC price could be forecast.

My main observation is that the Bitcoin-bulls underestimate the potential scale of the manipulation here. They look at the number of Tethers in circulation (about 2.2 billion), and compare that to Bitcoin’s market capitalisation (down from $320 billion to just over $100 billion, at the time of writing). But market capitalisation is not a reasonable comparison – because that is simply “market price” multiplied by “total number of Bitcoins in circulation”. It doesn’t tell you the total number of bitcoin being actively traded.

And more importantly, the ‘number of Tether in circulation’ does not tell you how many of those are being actively traded. Or used as collateral.

There are multiplier effects here that can scale well beyond what someone might intuitively expect when they look at those gross numbers.

As I keep telling people, I too could create my own $100 billion market cap cryptocurrency (with a bit of effort):

• I could get a programmer to code me some new altcoin atop the Ethereum network, with 1 billion coins for circulation;
• I privately sell 1 coin to my friend, and he ‘pays’ me $100 for it;
• He then sells it back to me for $100, and his debt is settled;
• Abracabra: my market capitalisation is ($100 price x 1 billion coins =) $100 billion.

And I did it with no money, except for the coding cost.

Of course, I now need to persuade someone else that it’s ‘for real’.

But Tether managed to do that. After all, they grew their coin issuances, all apparently backed by real US dollars, without any access to banking facilities:

Like magic.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.