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The Labyrinth of Tether: A new Mt. Gox or just a case of Hysteria?

The Labyrinth of Tether: A new Mt. Gox or just a case of Hysteria?

Reading Time: 8 minutes by on November 21, 2017 Altcoins, Bitcoin, Commentary, News

Currently, the rumor is going around is that Bitfinex and Tether manipulate the price of bitcoin upward with a fake Dollar token. Is there some truth to this or is it just scaremongering? We take a look at the subject.

For some months, an individual with the pseudonym “Bitfinex’ed” has warned on Twitter and Medium against an alleged fraud by Bitfinex and Tether. The story goes like this; Tether creates a digital Dollar token out of fresh air, and a group of traders uses them to manipulate the price of bitcoin by “spoofing” – placing fake orders which suggest a not existing demand. All under the eyes of Bitfinex, turning a blind eye or even being involved.

After the last two weeks saw a flood of nearly 200 million freshly minted Tether Dollars coming to the market, the Tether thesis popped up on popular Bitcoin forums and some Bitcoin media. While being of general interest for anybody involved in the ecosystem, it is noticeable that fans of Bitcoin Cash mostly push the fraud theory; eventually, because they are in search of an explanation of why bitcoin is still rising, instead of fizzling out in the long-expected death spiral of a full mempool and drowning prices.

There is no simple answer to the question, what’s up with the Tether theses. True? Not true? It’s hard to say. The only thing we can do is to shed some light on the building blocks of this complex story so that you can form your own opinion. Also, we can look for alternate explanations, which lead into a labyrinth of feedback loops between regulation, bank, Tether and the Bitcoin rally.

But let’s start with the base of it, with Tether.


The idea is to use blockchain technology to transfer fiat money, like the Dollar or Euro, has been around for some time. But Tether is the first to succeed this task.

The Hong Kong-based company uses the Omni protocol to process the Dollar, Euro and Japanese Yen on top of the Bitcoin blockchain. You can imagine it like writing a voucher on a banknote.

According to the FAQ, Tether backs the Tether token with 100 percent fiat money in a bank in Taiwan. The most widely used token is Tether Dollar. With it, you can transfer, receive and store Dollar without banks or payment providers. All you need is an Omni wallet.

Tether gives Dollar nearly the same properties as Bitcoin. One difference, however, is that you need to trust Tether, the company, to store the amount of money corresponding with the token issued on the banks. According to the website, it is possible to redeem the fiat money against the token. However, due to regulatory reasons, Tether explains that they cannot exchange tokens against the Dollar or Euro for everybody.

The company counters the doubt that they do not back the token with Fiat money, with an official audit made by a New York company.

Cryptocurrency exchange appreciate Tether as a suitable replacement for Fiat transactions – especially when the cooperation with banking partners gets problematic. The exchanges that use Tether include Bitfinex, Poloniex, Kraken, Bittrex and HitBTC.


For some years, Bitfinex has been the exchange with the highest trading volume for BTC-USD. That the company from Hong Kong succeeded in maintaining leadership seems like a little wonder, if you look at what happened to the company in the past few years.

First, Bitfinex was hacked in August 2016. After getting robbed of 119,756 bitcoin, the exchanges socialized the loss by giving user’s balances a haircut. Bitfinex compensated them with Omni based token, which represented a share in the income of the exchange. Not even one year later Bitfinex fully paid back every token, settling the debts to its customers.

Second, Bitfinex ran into massive problems with Dollar withdrawals. The Taiwanese banks, doing Dollar transactions for both Bitfinex and Tether, were informed by major US bank Wells Fargo in April 2017, that no international transfer from the accounts of the crypto companies will be processed in the future. The reason for this was most likely a stricter regulation of international Dollar transfers. Bitfinex and Tether started a legal charge against Wells Fargo, but Dollar withdrawals have remained a problem.

According to an announcement in May, Bitfinex withdrew the Dollar from the accounts on the Taiwanese banks and is again prepared to process withdrawals. However, only withdrawals bigger than $50,000 are processed. If you ask social media and forums, you usually get the recommendation to exchange Dollar against Tether Dollar or bitcoin, transfer it to another exchange and sell it there against Dollars you can withdraw to your bank account.

Third, Bitfinex retracted from the US market. In an announcement on August 12, Bitfinex said that they will immediately stop the verification of citizens of the US, and will completely cease service for US residents. The most important reason is that it is still highly problematic to transfer Dollars to the bank accounts of US citizens.  

These setbacks did not hurt Bitfinex’s business too much. The company is still the exchange commanding the largest trading volume for BTC-USD. An important aid in maintaining this position should have been Tether.

Minting Tether

Until the year 2017, the amount of Tether in circulation stagnated at 10 million, with each Tether worth one Dollar.

Then it started to rise and reached 60 million in May. “Since April 18, 2017, all incoming international wires to Tether have been blocked and refused by our Taiwanese banks,” the company announced. “As such, we do not expect the supply of tethers to increase substantially until these constraints have been lifted.”

However, history decided otherwise. The amount of circulating Tether started to explode in June; in July it had risen to 210 million, in August to 316 million, in September it grew to nearly 450 million, and in the first half of November, it added another 220 million. So Tether represents Dollars with a value of $676 million.

Think about it; during 2017, despite the blocking of Dollar transfers from the US, Tether increased the number of Dollar tokens from 10 million to more than half a billion.

In the meantime, Tether searched for new partners and found some. “We have been busy establishing a global network of money-transfer channels designed to be resilient against further aggressive action from correspondent banks,” the company stated. “We have also opened an escrow-based relationship with a U.S.-based institution to service qualified corporate customers.” Without going into detail, Tether explains, that “large customers are still able to move money into and out of Tether,” while “small retail-type customers will continue to encounter difficulties in moving funds,” depending on their jurisdiction.

If you ask Bitfinex’ed, there has never been the option to redeem Dollar:

“Tether has never redeemed a single Dollar, as issuance always rises and never falls. In theory, Tethers should be going up and down in market cap as people deposit and withdraw from it. But the reality is, nobody can withdraw. Nobody can deposit, either. They really want people to believe that someone has bought 550 million worthless Tethers for a product that doesn’t even work.”

Eventually, there is a connection between Bitfinex and Tether; both companies are registered, used banks in Taiwan and partnered to charge Wells Fargo. According to Bitfinex’ed, there are personal overlappings in the management, but this is difficult to verify.

Spoofing and Wash Trading

If you look at the issuance of new Tether and compare it with bitcoin’s price, you will notice that it falls together.

The creation of new Tether seems to accompany the monstrous Bitcoin rally of 2017, which pushed the price from $1,000 to more than $8,000 in less than a year.

A good example is the market turbulences of recent weeks. After SegWit2x was canceled, the price crashed from $7,500 to $5,500, but started to climb again, to reach a new all time high with more than $8,000. Parallel to this stunning price development, nearly 200 million Tether Dollars have been created in less than ten days:

  • 20 million on November 8,
  • 30 million on November 10,
  • 60 million on November 11,
  • 20 million on November 16 and,
  • 60 million on November 17.

It is not absolutely clear if the Tether issuance preceded the price tanking, or if it rushed behind. There are several explanations for this concurrence, and we will outline one later. First, however, we talk about the conspiracy theory about price manipulation, Bitfinex’ed and some Bitcoin Cash fans spread.

Bitfinex’ed called the rally in mid-June a “wash trade rally.” What happened is as follows; Tether created 25 million new Dollars. Nearly immediately the amount of Dollar on Bitfinex’s margin lending marketplace increased on about 20 million. A few days later the price grew by $1,000.

Margin Lending means that you lend money to other traders so that they can multiply their bets. It’s not very complicated; a trader borrows money to leverage their stake on a certain outcome, for example, that the price of an asset like bitcoin will increase. This bet is usually called a “long.” With daily interest rates of up to one percent, lending money on an exchange can be a profitable option.

Now we come to the conspiracy theory. It says, that Bitfinex creates Tether Dollar for nothing and throws them on the margin lending market, to create liquidity, which should not exist on the market, and to profit through interest rates. Further, it is said that Bitfinex – or another trader – buys its own orders, to manipulate the price upward (or downward) and engage other traders to borrow money on the margin lending market. This is called “wash trading.”

Finally, there is a rumor that there is some kind of “spoofing” on Bitfinex. “Spoofing” means that a trader creates exceptionally large buy or sell orders, which blow up one side of the order book, but cancels them shortly before they are accepted. A “spoofer” exploits this tactic to manipulate the price development. In the USA, there have been several legal charges and convictions against “spoofing” since 2015.

“Spoofy makes the price go up when he wants it to go up, and Spoofy makes the price go down when he wants it to go down, and he’s got the coin… both USD, and Bitcoin, of course, to pull it off, and with impunity on Bitfinex,” Bitfinex’ed writes. Spoofy is an alleged trader on Bitfinex, who uses $20 to $60 million to manipulate the market by exactly placed orders, which is tolerated by Bitfinex. The exchange denies that this is happening.

The conspiracy theory has a dramatic consequence, if true; the bitcoin price is bubbled up with arbitrarily created money. Not so different than the fiat markets, in which a constant stream of new central banker fiat money feeds an ever-growing bubble – except, that Tether and Bitfinex operate in a completely unregulated market. When the house of cards collapses – and believers in the theory are sure, that it will – a giant crash will crunch Bitfinex, Tether, bitcoin and other cryptocurrencies. It will be worse than Mt. Gox.

More Theories about Bitfinex, Tether and Bitcoin’s rally

Everything Bitfinex’ed writes is pure speculation. Maybe it is even a malicious smearing campaign against Bitfinex, or intentionally spread FUD to push down the price of bitcoin. There are a lot of other possible theories with regards to what’s going on with Bitfinex, Tether, and Bitcoin, and they are more likely to be true than the manipulation theory.

Let us start with that which is not such a mystery, namely that Bitfinex began to embrace Tether after bank transfers became a problem in May. What should the exchange do otherwise? Stop trading with the profitable BTC-USD pair? Similarly, you don’t need to be a sibyl to imagine how investors, who want to trade on a liquid exchange with large volume like Bitfinex, exchange Dollars to Tether Dollars.

Back in 2010, when banks and payment providers blocked WikiLeaks, it became a signal to use bitcoin instead of Mastercard. Similarly, when in 2017 banks started to block Bitfinex, it could have become a strong signal to use Tether instead of Dollar. Every new technology needs its key event.

Further, Bitfinex is not the only exchange to use Tether. Moreover, according to the Tether-richlist not even that with the deepest Tether wallet. At the top of the list is Bittrex, followed by Poloniex; these two exchanges dominate the Altcoin markets. For them, Tethers are very attractive. Their main business is in the Bitcoin-Altcoin trading, with a lot of digital currencies pairs. Fiat currencies and bank transfers are a bulky foreign body in an otherwise purely virtual business model. With Tether these companies are able to serve profitable trading pairs like BTC-USD or ETH-USD, without having the trouble of dealing with banks. Like with the investors, the deepening regulation of bank transfers and virtual currencies have become an incentive for these companies to use Tether instead of the Dollar.

Other than Bitfinex’ed’s speculation, the increase in the amount of the Tethers is not a contradiction, but a consequence of the Taiwan’s banks blocking transactions. The explosion of the number of Tethers might be a direct result of the tightening of international Dollar transfer rules by the US financial authority. As a river always flows down the hill, money flows around regulation. Bitcoin is an alternative to Dollars; Tether is an alternative to bank transfers when it comes to Dollar transactions.

At the same time, we see history repeat itself. Back in the days of Mt. Gox, the bitcoin price tanked because it was nearly impossible to withdraw Dollar from the legendary Tokyo-based exchange. So people exchange Dollar for Bitcoin. The cryptocurrency profits when regulation makes the Dollar flow more vicious.

In an interesting feedback loop, the massive rise of the bitcoin price has resulted in another Tether hype, which can explain the fast issuance of ever more Tether last months. The 200 million Tethers, created in less than ten days in November, is maybe not the cause of the rally – but its result; the markets want to go into bitcoin, but other ways in are barred.

But like the speculations of Bitfinex’ed, this is just another theory.

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