A recent investigation by Bloomberg into trading practices of Tether on crypto exchange Kraken, questions why the Tether price doesn't follow normal economics of supply and demand. What is Tether? Tether is\u00a0a 'stablecoin' cryptocurrency which is designed to be price stable with the US dollar with a 1:1 backing of each Tether coin to a US dollar. In the broader cryptocurrency ecosystem it acts as a haven for investors who want to maintain a position in cryptocurrency but temporarily exit a position in other cryptocurrencies such as Bitcoin. The stability of Tether price helps investors exit their position and avoid further volatility in the crypto markets without paying the transaction fees that are typically levied by exchanges and banks for converting cryptocurrency back to fiat (e.g. US dollars). The Suspicious Tether Trades The Bloomberg-led investigation focused on why price movements of the coin on the exchange were not correlated to trade volumes. In particular it found that the distribution of the number of trades of a certain volume included a larger than expected number of transactions of very specific amounts of Tether. The trade lot size of 13,076.389 was the third most popular clearing volume during the period investigated along with others that don't appear to be human created as they're specific to the fifth decimal place. Tether-USD Top 20 Trade Volumes on Kraken Data Source: Bloomberg via Github The article theorizes that these unusual trading amounts could be signals to automated trading bots used for a practice called 'wash trading'. Wash trading is a practice where a trader creates a trade with themselves to suggest to the market that there's more demand for the asset than reality. The practice itself is illegal in traditional financial markets but in the as yet relatively unregulated crypto markets has not been prohibited at this time. The article goes on to look at the patterns of trade volumes impact on the Tether price on the exchange.\u00a0 It found that in some circumstances consecutive buy trades\u00a0did not impact the price whereas in other instances even small volume trades did impact the price. In addition, during some of these trading periods that specific 13,076.389 volume trade wasn't having proportional impacts to the price. Considering that in normal supply and demand markets price should fluctuate based on demand, the Bloomberg piece speculated that this was another indicator of wash trading practices. The Bloomberg investigation did not however provide analysis of the order book of Tether on Kraken at the times of the trading practices it questions. Tether's History of Controversy Tether has become a controversial topic in the world of cryptocurrency both for its centralized nature and for its alleged role in the price manipulation of Bitcoin. The price of Tether and its backing by US dollars has been the subject of much speculation and discussion. In January, it was made public that there was an ongoing investigation by the\u00a0US Commodity Futures Trading Commission (CFTC), which issued subpoenas to both Tether and another crypto exchange Bitfinex. That investigation is thought to be related to market manipulation in the price of Bitcoin, which was also further investigated in a University of Texas-Austin paper earlier this month. Tether for its part has also been publicly attempting to restore its reputation and validate that the currency is truly backed 1:1 with US dollars. It recently\u00a0released a report performed by a law firm (Freeh, Sporkin & Sullivan LLP) that investigated bank account balances held by Tether to confirm that they indeed did hold an amount of US dollars equivalent to the number of Tether in circulation at the time. Although not a full audit, the report by the reputable law firm did go some way towards restoring Tether's reputation in the public eye. In Grizzle's view, stablecoins such as Tether defeat the purpose of the underlying goal of cryptocurrencies, which is to break away from the value ascribed by central banks to fiat currency. Though Tether may seem like an attractive vehicle to use when trading cryptocurrencies, in our view it's preventing the broader cryptocurrency ecosystem from causing a needed disruption to the established financial system.