Bitcoin plummeted in value by more than $44bn (£30.9bn) in January, marking the steepest monthly fall in its short history. Bitcoin dropped Thursday to trade below $9,000, a critical level of support that many analysts are watching. The decline followed reports that raised worries about increased regulation in India and potential price manipulation at a major exchange and Facebook announcing its ban on digital currency adverts.
Economists have repeatedly warned of a bitcoin bubble after the price of the cryptocurrency surged last year by more than 900%.
A growing number of virtual currency investors are worried that the prices of Bitcoin and other digital tokens have been artificially propped up by a widely used exchange called Bitfinex, which has a checkered history of hacks and opaque business practices.
The latest fall comes after news that one of the largest cryptocurrency exchanges is being investigated by US regulators over its links to a digital asset which, detractors fear, could be inflating the price of bitcoin by billions of dollars.
Concerns have been swirling in the cryptocurrency market for months about the status of Tether, a cryptocurrency issued by Tether Limited. It plays a central role in the operation of many leading cryptocurrency exchanges, including Bitfinex, but there is speculation that the company behind it may not hold the dollar reserves it claims.
The US Commodity Futures Trading Commission has been investigating the Bitfinex exchange and digital asset Tether since at least early December, when it subpoenaed both companies, according to a Bloomberg report published on Wednesday.
Tether is a cryptocurrency which is supposed to be pegged one-to-one with the US dollar. The idea behind it is to allow the flexibility of cryptocurrency trading, while still maintaining the stability of holding money in dollars rather than rapidly fluctuating digital currencies. Bitfinex allows users to sell bitcoins for dollars, and then “withdraw” the money using Tether tokens.
However, multiple critics, including one anonymous author writing under the name “Bitfinex’ed”, have suggested that Tether’s reserves are under-capitalised, and then when it creates new tokens, it does not deposit into reserves a corresponding amount of US dollars.
Since the majority of Tether tokens are used to purchase bitcoin, if they are not underpinned by equivalent US dollar reserves then a significant amount of the value of bitcoin would be based on shaky foundations.
The concern about Bitfinex is one of several issues that have helped depress the value of virtual currencies over the last month, after a roaring, year-long rally. Regulators in several countries, like South Korea and the United States, have expressed concerns about manipulation and fraud, and hinted at a crackdown.
In Japan, a large virtual currency exchange, Coincheck, was hacked in late January and lost nearly $500 million worth of a virtual currency known as NEM, raising questions about the relatively untested security practices of virtual currency exchanges.