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iTrust Daily Insight

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4th November
iTrust Daily Insight
Edition 11.4.2019

iTrust Capital Commentary on Article Claiming Price Manipulation in Bitcoin Markets

The Big News

Today — as is sometimes true — there is a piece of news of such singular importance to the relatively tiny world of digital currency trading that we are compelled to interrupt our normal way of doing things and focus on just that one piece of news so that we can put it into perspective.
Today the “big news” is that a pair of academics have updated their 2018 academic paper.  They now assert  their analysis of the blockchain for Tether and for Bitcoin shows that the dramatic price-run-up of Bitcoin in late 2017 was very likely caused by the creation of Tether not backed by dollars and then those newly created Tether digital coins being used to purchase Bitcoin — driving up the price of Bitcoin.

Muted Market Reaction

According to CoinMarketCap.com, Bitcoin prices today are up about 1% and Tether prices today are down about 1/2%.  Bitcoin is now trading at about $9295 per coin, according to the site.
On the exchange for Bitcoin futures, which trade on the Chicago Mercantile Exchange, which is regulated by the US government’s Commodities and Futures Trading Commission (CFTC), the price for the near contract is up about 1 1/2%.to $9405 per coin.
Looking at the world’s original global currency, gold, the near contract for gold is basically unchanged today at $1508 per ounce.

Our Analysis of their Paper

From all this and skipping some parts of our logical progression for the sake of our readers’ time — we conclude the academics are likely doing honest academic work using forensic tools at their disposal (ie using the blockchain to investigate whether there was price manipulation).  They likely are at least pointing to “smoke” even if their claims as to what is causing the smoke turns out not be the “gun” they think it is.  
In other words, they have at least led the way in the method of looking at blockchain to understand whether there is price manipulation with the digital currency markets.
Their own theory regarding the specifics of the 2017 price increase and subsequent price fall of Bitcoin will likely prove inconsequential in the history of digital currencies.
What will prove lasting is the method of their pioneering work.
In other words, we choose to focus not on any aspersions that they are casting or that others are throwing at them.
Instead, we choose to focus on the light they are casting on the entire market.  That light will likely lead to greater confidence of blockchain.  Greater confidence of blockchain will likely eventually lead to greater confidence in digital currencies.

Alternative Explanation

As you will see from the press reports today, the founders of the company that mints Tether believe the paper to be academically non-rigorous and may even have been written to bolster some sort of lawsuit (perhaps against their own company? the reporting was not clear).
The better reporting also points out that arrests have been made in Poland connected to using digital currencies to launder money gained from illegal activities.  Again, the writing on this reporting was weak but presumably the writers of the articles believe there may be some sort of connection between the Polish money launderers and what the academics have uncovered here.

Conclusion

We believe the result from all the reporting and publicity surrounding this academic article will likely be an increase in trust in the digital currency markets by both institutional and retail investors.  We believe that as other academics learn to emulate the methods used by Griffin & Shams in their article being published today then those other academics will also be able to use the blockchain to make sure price discovery among digital currency market participants is actually fair and free from manipulation.

Link to the paper:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com.

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