Sifts Data for Signs of Rigged Markets John Griffin, who discovered the Bitcoin-Tether connection, seeks to expose “the fruitless deeds of darkness.” By Matt Robinson and Nick Baker October 12, 2018, 4:00 AM CDT From Griffin PHOTOGRAPHER: BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK At the height of Bitcoin mania in December, when the price of the digital currency was climbing toward $20,000, finance professor John Griffin started digging into 2 terabytes of trading data—equal to a tenth of all the text housed by the Library of Congress. His findings rocked cryptocurrency markets. Griffin and Amin Shams, his co-author and a doctoral student, zeroed in on an obscure and controversial cryptocurrency, Tether. Its price is pegged to $1. Part of the idea is that crypto traders can use Tethers as convenient stand-ins for U.S. dollars. Griffin and Shams noticed that when Bitcoin fell to certain levels, purchases using Tether would flood in to stabilize prices. After crunching the data, they concluded this fit a pattern consistent with someone, or a group of people, trying to manipulate Bitcoin prices. The two researchers made the startling claim that half the gains in Bitcoin last year can be attributed to Tether. The results of their June paper were picked up around the world, helping to send the prices of digital assets lower. J.L. van der Velde, chief executive officer of Tether Ltd., said in a statement in June that the company’s digital currency can’t be used to artificially prop up Bitcoin. The Bitcoin paper wasn’t the first time Griffin had pointed at market data to say something was fishy. The University of Texas at Austin professor has drawn ire on Wall Street for his previous work on ratings companies, investment banks, and, last year, a paper alleging the finance industry’s favorite volatility benchmark, the VIX, was rigged. He revels in the idea that his academic work has an impact beyond academia. “I not only want to understand the world but make it better,” he says. Griffin’s work has found an eager readership among watchdogs. In the years after the financial crisis, he worked with the U.S. Department of Justice in its investigations into mortgage fraud. He met with the Commodity Futures Trading Commission in June about another paper of his, a meeting he declined to discuss with Bloomberg Businessweek. Cboe Global Markets Inc.’s VIX index is being gamed. Cboe rejects that, saying in a letter to customers this year that “the academic paper’s analysis and conclusions are based upon a fundamental misunderstanding about how VIX derivatives are traded and settled.” Their paper argued that S&P 500 options volume spikes at suspicious times, but only in contracts used to price the VIX. Those options trades wouldn’t make sense, they argued, unless they were part of an effort to manipulate the market. Cboe said in its letter that the market behavior Griffin and Shams considered suspicious is consistent with normal and legitimate trading. Griffin isn’t convinced by Cboe’s explanations. “There is no doubt we understand how the market works,” he says. Meanwhile, he fears the VIX paper turned into a how-to guide for would-be manipulators. He says people at banks, whom he wouldn’t identify, contacted him asking for the appendix to the paper, which describes in detail how the suspected manipulation could work. A long list of plaintiffs have sued Cboe over the alleged manipulation. Griffin says he currently doesn’t plan to work with any of them, despite requests to do so. However, he wouldn’t rule out the possibility that he could get paid for offering his time as a consultant in the future. With each publication, Griffin gets more attention. The paper on alleged Bitcoin fraud has been downloaded more than 20,000 times on the Social Science Research Network, making it one of the most popular on the site in the past year. The SEC cited it when rejecting a Bitcoin exchange-traded fund, which would make it far easier for investors to trade in crypto. The watchdog said there was still reason to worry that the underlying Bitcoin market can be manipulated.