Crypto capital flows between exchanges in chaos, a benefit for Bitcoin

The recent meteoric rise of Bitcoin has confounded the experts, who rely on their technical charts and the messages that result from their favorite indicators, trend lines, and levels of support and resistance. Bitcoin, however, is marching to the beat of a different drummer, driving the analyst community to question everything and to slice and dice the data until a logical argument comes forward. TokenAnalyst, a London-based provider of blockchain data, may have stumbled on a major talking point. Their research has revealed that capital inflows between exchanges have radically changed.

More specifically, the research firm estimates that: “Withdrawals from trading platforms including Bitfinex, BitMEX, Binance and Kraken have exceeded inflows by about $622 million over the past 5 days.” The alleged Bitfinex/Tether scandal may have disturbed these capital flows in such a way that the “safe haven” effect took over, i.e., when times are tough in Crypto-Land, investors with weak hands immediately liquidate positions and direct their capital to the most secure and liquid asset in the space, namely Bitcoin. The current rumor is that as much as $1.7 billion was withdrawn from Bitfinex. It is not cause for alarm, since Bitfinex also had a successful fund raising, selling $1.1 billion of tokens.

Bitcoin has seen its market share of the total system grow from 50.5% in late March to 56.1% in today’s trading. Analysts have been attributing this surge to fundamental factors, such as “whales” moving funds about, major platform launches from the likes of Fidelity, Bakkt, TD Ameritrade, and E*Trade, and favorable news about Facebook and other corporates that have significant initiatives in the works. In the midst of these obvious causes, the ensuing BTC rally has, perhaps, disguised what might be going on in the background at exchanges, as the Bitcoin “safe haven” effect takes hold.

John Griffin, a finance professor at the University of Texas who has been studying price manipulation occurrences in the crypto market, noted:

Since Tether is insufficiently backed, it means that some of the reserves backing customer assets on exchanges are likely insufficient. So smart customers will not custody their funds on exchanges and pull their crypto off exchanges. This could put further upward pressure on Bitcoin prices as one would rather take fake money and exchange it to Bitcoin.

Griffin has been very interested in the impact that Tether has had with regards to price manipulation tactics. Tether’s “USDT” stablecoin is often used as a resting spot, if you will, until a storm blows over. Investors can then leave their capital invested in cryptos, never triggering a fiat conversion event that might send up red flags at traditional banking institutions. If investors wish to drive prices north in a spike, they can easily achieve this objective by moving major amounts in and out of, for example, Bitcoin. With low liquidity and “hodlers” doing what they do (hold onto positions), major buy orders can cause prices to soar in an instant.

Griffin has already spent a good deal of time researching this very process, but the focus of his effort was the parabolic run up of Bitcoin prices in 2017. Griffin co-authored a paper last year that analyzed Tether’s role in the speculation mania that drove BTC prices nearly up to $20,000. He and his partner concluded that: “Tether was used to manipulate cryptocurrency prices, and that market manipulation accounted for half of the run up.”

Fast forward to today, and Griffin is struck by today’s similarities with the events of 2017:

Given that the Bitcoin market can be manipulated in such a significant way, it would not be a stretch nor surprising to find that manipulative activity is behind the recent run up when the underlying market mechanics are similar to before.

Unregulated financial markets are known for the potential of price manipulation tactics to rob investors for the benefit of perpetrators, who would otherwise be considered criminal in our more traditional, heavily regulated financial markets. If regulators and institutional investors are to feel comfortable with digital assets going forward, then something must be done to clampdown on these nefarious participants that prefer to manipulate crypto prices for gain, rather than play by the rules.

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