A recent study has finally quashed opinions gravitating towards the impact of tether (USDT) on the price of Bitcoin. Dr. Wang Chun Wei who lectures at the University of Queensland’s Business school stirred the polity with findings negating widely held speculations about the intent of Tether Limited’s periodic releases of large lots.
Wei’s findings have opened the portal for more reviews following its acceptance into the October 2018 issue of Economics Letters. (The paper was initially published in May)
Summarizing the findings in his paper titled “The Impact of Tether Grants on Bitcoin.”
“Our findings show that tether grants were potentially timed to follow Bitcoin downturns and subsequent Bitcoin/tether trading volumes increased… However, the impact of tether grants on Bitcoin returns were not statistically significant, and therefore tether issuances cannot be an effective tool for moving Bitcoin prices,” Wei noted in the paper.
Maintaining a steady price of about $1, Tether prides itself as the market’s leading stablecoin. While each USDT is ostensibly backed with a U.S. dollar in reserve, this claim is being disputed, as the company is yet to substantiate it through the audit of their currency reserves. In spite of all this, the lucrative value of tether to crypto exchanges has never been in doubt but the speculations surrounding it in recent weeks, have led at least one top-20 exchange to drop tether for other options.
Volume of USDT
Wei’s research focused heavily on the volume of USDT in the market and the effect of periodic changes in the volume. As such, criticisms that will most likely trail his findings will address misgivings about the amount of U.S. dollar backing USDT.
In Wei’s opinions, the discourse outside his findings is meant to be the prerogative of regulators and auditors.
His work mainly sought to know if the issuance of new USDT could be used to inflate the price of Bitcoins in the market. The problem was well articulated by the anonymous author of January’s “The Tether Report.” He wrote:
“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’s 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 market growth in tether issuance.”
Tether periodically issues large lots of new USDT, which are known as grants. These grants according to Wei, seem to occur in batches and are intentionally broken into smaller blocks after which their issuance can last for many days.
While summarizing the critique of perceived detractors of Tether, he wrote:
“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.”
The overwhelming presence of Bitcoin-tether trading pairs was largely felt across exchanges in the market, and this was buoyed by the presence of USDT worth over $2 billion in the market.
No Pump Found
The paper also noted an increase in Bitcoin trades whenever new USDT is issued. This, however, can be misleading when taken on the surface. In Wei’ words:
“However, you cannot use trading volume to predict price, as the effect is simultaneous. In my paper, I state that past trading volumes do not impact future returns.”
In his bid to answer these questions, Wei made use of the “autoregressive distributed lag and “unrestricted vector autoregression” (VAR). Both time series models were respectively used to find out if there is a causal relationship between something in the past and something anticipated for the future.
The findings showed that even after adding variables about USDT, the direct impact on BTC returns was neither better than when BTC is assessed on its own.