The US government plans to auction off 29,656 bitcoins later today and many analysts and financial institutions have weighed in on what increasingly becoming a major event in the eyes of the mainstream media.
Now Citi, the New York-based financial services giant, has made its opinions known too, examining the impact of the impending sale in a note sent out late yesterday penned by research analyst Steven Englander.
The bitcoins to be auctioned were seized by the US Marshals Service (USMS) following the shutdown of online drugs bazaar Silk Road. The USMS told CoinDesk that it is not certain whether it will issue information about the winning bidders for the funds.
Effect on price
According to the note, the firm's foreign exchange division, CitiFX, estimates that the auction will account for about 40% of the average daily volume of bitcoin transactions, and therefore is likely to have an impact on prices.
Furthermore, it says, the presence of big bidders is not the only problem facing small investors who were hoping to get in on the action:
"Pumping such a large quantity into the market should weigh on prices. The terms of the auction make it difficult for small bidders ($200k deposit, each of the nine blocks valued around $1.8m), so the downward pressure is probably exacerbated by the limited number of investors interested in and capable of bidding."
Citi also points out that the auction takes place between 6am and 6pm EDT, so any bidder will have to consider possible price fluctuations. Citi speculates, therefore, that "ordinary buyers" could choose to wait until the last possible moment to place their bid.
Furthermore, the note adds that the USMS is selling only about 20% of the total seized Silk Road bitcoin stash, so more auctions are likely to follow in the future.
Due to a number of factors and the belief that the upcoming auction has contributed to the 10% price drop since 11th June, Citi believes the bitcoin price will hit bottom during the auction:
"Normally, we would expect the price to hit bottom around the time of the auction or soon after. Bitcoin isn’t that liquid so the sale will be hard to swallow. It is unlikely that anyone will bid above the market price – it would make more sense to just to buy in the market in bits and pieces and it’s not as if there is indication that there is bitcoin demand that is unmet because it is hard to buy lumpy amounts. There is simply little demand for lumpy amounts."
The possibility of further auctions is also weighing on bitcoin's value, as many bidders anticipate the price pressure that these auctions are likely to exert. Citi believes this issue will cause "more extended downward pressure".
The document further questions the wisdom of putting the bitcoins up for sale in an auction, concluding that the auction structure is "unnecessary and probably suboptimal" due to the supply-demand imbalance it is likely to create.
"The USMS could hire a couple of tech-savvy college kids to dribble its bitcoin holdings into the market, benefiting from the pseudonymity of bitcoin transactions. Selling bitcoin with its somewhat liquid market is not the same as auctioning off a 1998 Chevy with a couple of bullet holes in the driver’s door. The concentrated selling may lower prices more than needed, reducing the revenues collected," Citi argues.
No industry consensus
The auction has attracted a lot of media coverage and interest, but so far there is no clear consensus on what its impact on the market will be. While Citi expects prices to drop following the auction, some other analysts and industry leaders do not.
Gil Luria, who keeps track of bitcoin for Wedbush Securities, believes the auction should not have much of an impact in the long term. Similarly, CEO of Vaurum, Avish Bhama, expects a rally after the auction.
In any case, the elephant in the room is the rest of the stash, the remaining 144,000 bitcoins seized from Silk Road. It remains unclear when the government plans to auction them off, or whether it will decide to choose another model for the sale of these coins.
Auction image via Shutterstock