We do the research, you get the alpha!
Sentiment toward dollar-pegged stablecoin tether (USDT) tends to foreshadow shifts in the asset’s market capitalization by up to 12 days before surges. A new study said those price movements are suspicious, and could be the result of “sentiment manipulation by insiders.”
Augmento, a sentiment-analysis research firm based in Berlin, analyzed 93 “sentiment indicators” on Reddit, where USDT is heavily discussed, and discovered that Redditors— bearing good or bad news about the stablecoin—often prefigure corresponding increases or decreases in its overall market cap.
The prolonged delay before spikes in market cap is cause for suspicion, says Augmento, because it gives time for “insiders” to take advantage of lucrative arbitrage opportunities.
“Assuming that increased sentiment activity leads to a sell-off of Tether, someone could increase that sentiment activity, buy cheaper when prices fall and sell when tether normal," Augmento COO Bijan Dominik Farsijani told Decrypt in an interview.
Tether did not respond for comment.
Tether is designed to remain pegged to the dollar, and acts as a convenient stand in for foreign traders who cannot access US capital, as well as traders who want to enter and exit trades without converting to fiat. Though the stablecoin was launched with the promise that each tether was backed by a dollar, it was subsequently revealed that a fractional reserve backs the stablecoins, which supposedly covers only 74 percent of the money supply.
The company that issues tethers, Tether Limited, was earlier this year sued by the New York attorney general’s office, which alleged that the company behind token’s issuer, iFinex, had masked an $850 million deficit in its finances. That news compounded concerns about alleged market manipulation—because Tether’s total volume generally equals that of Bitcoin, the theory goes that Tether surges are engineered to pump Bitcoin’s price.
As Decrypt reported earlier this year, those pumps are indeed telegraphed in advance. Large “prints” of USDT are issued directly by Tether to its wealthy corporate clients, often based in China and Russia, in response to “rough, projected demand.”
Augmento’s study appears to elaborate upon this. Sentiment, often involving legal and regulatory issues, tends to emerge between “8 and 12 days” before the token’s market cap jolts correspondingly upwards or downwards.
“The most interesting aspect is that we see increased sentiment activity across almost all 93 sentiment and topics we measure,” said Farsijani. “That means that there is more communication about Tether before the market cap goes up.”
The benign explanation is that of course Tether sentiment goes up before a market cap increase—that’s why it increases. But the apparent lack of a discernible catalyst, to Augmento, is suspicious.
Indeed, Augmento believes the sentiment is spread by “fake accounts.” Though the research firm is unable to corroborate this, there’s some circumstantial evidence that suggests it. For one, leaked messages seem to detail the company’s attempts to drum up positive sentiment on Reddit, or “astroturfing.” And internal records from Bitfinex, Tether’s sister company, show executives at the company fretting over how to combat negative press.
Augmento describes several ways in which Tether, or its investors, might profit from spikes in sentiment. The easiest way, it says, is to take advantage of arbitrage opportunities created when positive or negative sentiment causes Tether’s dollar peg to break. “The easiest manipulation is to spread FUD, buy USDT with a discount after the price falls, and later sell it for $1, when the price normalizes,” the report says.
The next possibility is even more speculative. Augmento writes that Tether’s private clients manipulate sentiment downward to generate an artificial discount. When the 12 days lapse and the tethers go into wider circulation, the price “normalizes,” and the client can buy bitcoin for bargain dollars.
"There have been numerous allegations of Tether/Bitfinex manipulating online discussions,” said Farsijani. “Now, our data establishes scenarios for how sentiment manipulation could actually pay off for insiders. The link between the mind of the market and digital assets shows how important sentiment data will be in a truly decentralized future."