Speculations surrounding the supposed influence of Tether in inflating the price of Bitcoin might have been put to rest by a recent academic study. Dr. Wang Chun Wei, an academician at the business school of the University of Queensland, Australia carried out the study and suggested that tether, the stablecoin tied to the US dollar, has no significant effect on the price of Bitcoin. The findings are bound to trigger reactions from quarters where the issuance of tether (USDT) has long been held as being responsible for the rise in the price of Bitcoin.
The supposedly controversial stable coin has been embroiled in reports of manipulation despite official releases by the CEO to debunk such claims.
Wei’s findings, which were initially published in May have been approved for the October 2018 issue of Economic Letters. The paper titled “The Impact of Tether Grants on Bitcoin” noted that there was no statistical significance to associate the issuance of tether with increase in Bitcoin prices.
The report stated:
“Our findings show that tether grants were potentially timed to follow bitcoin downturns and subsequent Bitcoin/tether trading volume increased… However, the impact of tether grants on Bitcoin returns was not statistically significant, and therefore tether issuances cannot be an effective tool for moving bitcoin prices.”
Wei’s research will surely attract debates among relevant players in the industry for some reasons, chief of which is its failure to address misgivings about the amount of U.S dollars cushioning the tether. Wei’s study, conveniently focused on the volume of USDT in the market and fluctuations in the volume.
In his remark, Wei noted that such inquiry is at the prerogative of regulators and auditors to decide.
His paper has only put its radar on whether the issuance of new USDT could be used to manipulate the price of bitcoin. Another author, albeit anonymous, once criticized tether in a January report, titled “The Tether Report” where he noted that:
“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 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.”
Grants – a technical term for large lots of USDT periodically issued by Tether Limited is perceived as a quantitative easing aimed at boosting economic operations through the expansion of liquidity.
In Wei’s words:
“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.”
Based on the premise that the increase in Tether was primarily to purchase bitcoin, Wei advanced the hypothesis as to whether tether grants pushed up bitcoin prices.
The study also revealed that a large chunk of the market, in the tune of over $2 billion still exist on bitcoin-tether trading pairs. The paper further noted an increase in bitcoin trading as USDDT grants are issued. Nevertheless, the observation is not to be taken wholly.
While acknowledging the correlation between trading volume and price, Wei said trading volume could not be used to predict price, as the effect is simultaneous.
“In my paper, I state that past trading volumes do not impact future returns.”
Wei employed two time-series models to insert different variable over a period and observe any causal relationship. The models were specifically designed to find any evidence of changes following the release of new grants.
For retrospective and a predictive investigation of causal relations in the past and the future, Wei used an “autoregressive distributed lag” model and also an “unrestricted vector autoregression” (VAR).
In simplifying these models, Wei wrote:
“We have a null model that tries to explain bitcoins returns using past bitcoin returns. We have a full model that tries to explain bitcoin returns using past bitcoin returns and past tether grants.”
To put succinctly, when you sum up variables about USDT, it does not show any direct influence on BTC returns any better than just looking BTC on its own.