Has Bitcoin Been Subjected To Fraud?

money, Cryptomania


For the past few months, I have always been under the illusion that Bitcoin is currently a bubble. The reason for this is that the substantial increase in Bitcoin price is mind-blowing and incomprehensible. However, until today, I have had no legitimate reason for why Bitcoin is a bubble. New evidence has lead me to believe Bitcoin is under the influence of fraud (due to this article which I have read recently). While this report outlines a theoretical reason on how Bitcoin could potentially be under fraudulent influences, I have decided to test if this is the case statistically.

What is Bitfinex?

Bitfinex is a cryptocurrency exchange. Like other cryptocurrency exchanges, it allows for clients to buy and sell Bitcoin and other cryptocurrencies. Bitfinex was founded in 2012 and is a Taiwan based company.

The Bitfinex Miracle

As of recently, Bitfinex is currently enjoying a massive amount of success. As per the source, Bitfinex holds 41.72% of total volume traded over the past seven days. Thus, this leads me to look at Bitfinex, and other Bitcoin exchanges’ share of total volume trades over the past six months (between sixth of June to sixth of December). The data for volume traded can be obtained here. After doing some econometric tests on Bitcoin prices against the volume of trade between different exchanges, only three exchanges stand out as being statistically significant. As a result, I have decided to take a look at the changes in the total share of trading volume between the period.

As shown above, between the statistically significant exchanges, Bitfinex had the most significant growth in daily volume trade amongst the three. However, when we test the relationship between the changes in the volume of Bitfinex and the other two (individually), we see the following results.

  • Bitfinex and Bitflyer: Bitflyer being the Dependent variable, and Bitfinex the regressor.

R-squared: 0.750874

  • Bitfinex and Gemini: Gemini being the dependent variable, and Bitfinex the regressor.

R-Squared: 0.276100

To translate these econometric tests into English, they mainly show the relationship as the volume of Bitfinex increases, so does the amount of the other two exchanges respectfully. Therefore, this means that if trading activity on Bitfinex increases, the other two markets will see trading activity rise respectfully.

After establishing this relationship, we then want to look at what happens to the price of Bitcoin when trading activity increases. With this, we test the percentage of volume traded (against all volume of Bitcoin traded) versus the price of Bitcoin which is available from CoinDesk. The results follow as:

  • Bitcoin Price vs. all three exchanges, Bitcoin being the dependent variable, and all exchanges as regressors.


What is established here is that as there’s an increase in the volumes of Bitfinex (as a percentage of all Bitcoins traded), we see that the price of Bitcoin increases. However, if we look at the other two exchanges, we know that it contributes to a decrease towards the price of Bitcoin. What this data tells us is, A) when the trade volume increases at the Bitfinex exchange, it contributes towards an increase in Bitcoin prices meaning that economic agents are looking to purchase Bitcoin on the market. B) when the trade volume increases on the Bitflyer and Gemini exchange, we see that it contributes towards a decrease in Bitcoin prices, indicating that economic agents in these exchanges are attempting to sell their Bitcoin instead.

From all the data established above, what we see is the following: When economic agents in the Bitfinex market start to trade and purchase Bitcoin on the aggregate, this encourages economic agents in other exchanges in the other two relevant markets to begin increasing their trade volume but does the exact opposite. The question is, why is it that Bitfinex increase offsets the other two exchanges decreases? The answer to the Bitfinex miracle may be down to fraud involving Tether.

Tether, a potential driver for fraud?

What is Tether? Tether is a cryptocurrency pegged to the US Dollar, launched by Bitfinex exchange. For every one Tether issued, it is backed by approximately one US Dollar. The apparent reason on why this cryptocurrency is released is because it attempts to allow economic agents to move funds from Bitcoin towards Tether if they believe the price of Bitcoin is going to reduce. However, conspiracies argue that Tether uses are for a different function.

The conspiracy goes like this: Tether allows for Bitfinex to produce a significant amount of Tether, as no transparency is in place towards how Tether is created, stored, and accounted. In turn, this, allows Bitfinex to manipulate Bitcoins value. How are the two connected?

What Bitfinex would do is the following: issue Tether units and thus distribute them towards shell companies or shell entities which have apparently exchanged for US Dollars. As a result, Bitfinex has received an inflow of US Dollars for the exchange of Tether, and therefore use this inflow to invest into Bitcoin, thus artificially propping up the value of Bitcoin. One might ask, how does Bitfinex get away with a possible operation like this? The introduction source indicates that Bitfinex may use countries which has widespread corruption as a source to avoid audits.

Tether currently, is being speculated if it can achieve liquidity, however, as financials or any other material are not available, this is unknown. An example of this (introduction source) is that it is speculated if 814 million US Dollars of Tether exists, as no one knows where it is held, nor what its use. Some conjecture (such as Charlie Lee, the founder of Litecoin) that Tether is being “printed” to prop up the price of Bitcoin. Additionally, individual customers have been denied to withdraw their funds of Tether, as Bitfinex cannot guarantee the exchange between Tether and US Dollars.

With the information provided above, we must conduct a test to see if such a relationship between the volume of trade on Bitfenix exists with Tether. The econometric analysis presented below shows the link between Bitfenix volume trade and the volume of Tether traded.


As a result, the increase in the volume of Tether astronomically increases the amount of Bitcoin traded on Bitfenix. The econometric data tells us that Bitfinex is potentially, and fraudulently issuing Tether to prop up the volume of trade on Bitfinex, thus as seen from other data above, artificially increasing the prices of Bitcoin. While this may seem like a good idea now, this may be damaging towards both the Tether market and the Bitcoin market.

What if a recession happens?

Assuming the US or world economy goes into recession, what will happen to Bitcoin and Tether? From the data gathered above, I believe that the Bitcoin bubble will burst as a result of the potential fraudulent act done in the Tether market to artificially bid up the price of Bitcoin.

First, we start with the Tether market. If a recession happens, real clients using Tether may ask for their money back by merely attempting to sell their Tether on the market. However, due to the historical difficulties as mentioned by some clients who tried to retrieve USD for Tether, it is likely that Bitfinex would panic and deny requests for actual exchanges, potentially shutting down the actual Tether exchange. This shutdown will have two implications. First, a Tether exchange panic run will happen which real worldwide clients will demand deposits. Unfortunately, Bitfinex would not be able to honor the claims. The second implication would be that because the side which artificially pulls Bitcoin prices will no longer have the means to do so. Thus, Bitcoin prices will start to stagnate. I believe this stagnation will happen between Q2 2018 to Q4 2018.

As a result of the Bitcoin price stagnation, clients will no longer feel confident in Bitcoin; thus, the Bitcoin run will come to an end. A sell-off of Bitcoin could potentially happen, or worse, the exchange may crash if Bitfinex comes under fraud investigation, finding that money used to purchase Bitcoins on the exchange (by Bitfinex) may not exist. Potentially, this is a doomsday scenario waiting to happen.


What have we established here? At first, it may seem that regular market forces are bidding the price of Bitcoin higher. However, when looking at it in more detail, why is it that one exchange has increased their total share of daily Bitcoin trade volumes over the past six months? Additionally, why is it that as total trade volume rises between the three statistically significant exchanges, only one can contribute towards the bidding up of Bitcoin price, but the other two contribute towards the decrease of Bitcoin prices? The reason for this could potentially be due to fraudulent activity. As shown in theory, and with statistical evidence, we see that trading volume of Tether may artificially increase the total trading volume of Bitcoin on the Bitfinex exchange, thus artificially raising the price of Bitcoin. If a financial crisis or a recession is upon us, then the future of Bitcoin and Tether is in jeopardy due to the negligence of not the Bitcoin system, but rather a few players are artificially bidding up the price for their unfair gains.

Bitcoin and its ability to be an independent monetary system should be welcomed in the long term. I believe that Bitcoin will have the ability to solve monetary issues in a decentralized manner compared to how central banks handle monetary matters. Historically, decentralized free-banking monetary systems have proven to be more stable than today’s monetary policies, as described by free bankers like George Selgin (an influence of mine). Therefore, this is not an article which criticizes Bitcoin in the long term, but instead shows that the current charge for Bitcoin is potentially artificial. Thus, I continue to hold the belief that in the short term, Bitcoin is a bubble, however, in the long term, Bitcoin is the future of monetary transactions.


Calculations and data obtained for this article have been selected with carefulness to avoid sampling errors. Additionally, with calculations carried out, the author has double checked the workings to prevent non-sampling errors. However, both sampling and non-sampling errors which are unknown to the author may exist. The author takes a considerable amount of care to avoid non-sampling and sampling errors arising from the research.

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Baland Rabayah

Baland Rabayah is a student of accounting and finance at Bangor University and is also pursuing a Graduate Diploma in Economics at the University of London. Baland holds a Diploma in Accounting and Finance from the Bahrain Institute of Banking and Finance. He plans to pursue to continue his studies by doing a master's in economic history and a PhD in Economics. Baland follows a mixture of Chicagoan and Austrian principles in economics, with his influences being Murray Rothbard, Ludwig von Mises, Friedrich Hayek, George Selgin, Lawrence H. White, Peter G. Klein, Ronald Coase, and Milton Friedman. He is currently part of the Being Libertarian Merchandise Project’s management, and runs his own investments. Baland is also the former CEO of MoreTech Bahrain, a start-up company which attempted to launch Bahrain's and the Middle East's first flagship smartphone. He is a racing enthusiast, and regularly races professionally in Bahrain's SWS races.


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