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How the US Government's Sale of 30,000 BTC Could Impact Bitcoin Prices

(@danielcawrey) | Published on June 26, 2014 at 20:35 BST

On Friday, 27th June, the US government is set to auction off 10 blocks of bitcoin, equaling the roughly 30,000 BTC confiscated during the shutdown of infamous online black market Silk Road.

Once complete, winners will get a bill of sale from the government, and the coins will then be transferred from government ownership to private parties. Those final movements will be seen on the block chain.

However, exactly how much information will eventually be made available about the auction and its winners through official channels is still unclear. Speaking to CoinDesk, a representative from the US Marshals Service (USMS), the federal agency charged with carrying out the sale of the assets, indicates that it is not certain whether the organisation will issue any information about the winners.

Should such a statement be made by the USMS, the representative suggested, it would not be distributed until 30th June, the Monday following the auction.

The potential absence of an official release is notable, as the identity of the buyers and the final sale price of the bitcoins is likely to influence the price of bitcoin. Still, even without such details, the day's events are likely to weigh heavily on traders and investors.

Harry Yeh, managing partner for San Francisco-based Binary Financial, a firm that is bidding on all 10 blocks of BTC, said those involved in the market should be primed to react, stating:

"We expect on the day for there to be an increased volume of trading and heavy selling pressure."

Expect volatility

One of the central reasons many suspect the auction will have an effect on the price of bitcoin is the historical evidence that such news events cause turbulence in the market. For example, reports that the government would sell the roughly 30,000 seized bitcoin from Silk Road caused the price to behave erratically on 18th June.

The development is just one of a number of news events that have affected prices, a fact acknowledged by Gil Luria, managing director of bitcoin-friendly investment firm Wedbush Securities.

Addressing the impact the final auction news could have on the market, Luria told CoinDesk:

"Bitcoin has such a wide range of outcomes. I would be very surprised if the price of bitcoin didn't fluctuate a lot."

In the 24-hour period following the initial auction announcement, the price of bitcoin dropped more than $60 from $633.84 down to $565.28 – a 10% decrease overall.

As the chart illustrates, recoveries were also made following that day's low.

btcjune1112

Over that following weekend, the price dipped further, hitting $553.28 before hovering back around the $600 range.

As such, any current volatility in the market could be magnified by traders and investors who are themselves fearful of continued fluctuations. Not wanting to risk their bottom lines, some may cash out of the bitcoin market to reduce any potential losses.

Still, Brett Stapper of Falcon Global Capital, which previously sought to purchase seized coins but is not participating in the auction, told CoinDesk he believes such uncertainty has been present in the market for some time:

"I feel that the government having such a large number of bitcoins in their control has created a lot of uncertainty within the industry. Speculation as to if, when, and how they would liquidate has been a topic of discussion since October."

Stapper's comments suggest that traders may even welcome the final relief of knowing that the 30,000 BTC has found a home on the open market and potentially respond accordingly.

Buyer advantage

Yeh told CoinDesk that even from his perspective as a bidder, the auction process is filled with uncertainty. For example, he says his organisation hasn't received any clarity on what amount he should bid at the auction or if its bid will be accepted.

Despite this, he believes being involved in the auction is better than trying to buy large quantities of BTC on the open market.

Binary Financial and other investment firms like SecondMarket are all putting in bids for the seized coins in part because of intrinsic advantages to bulk bitcoin buying. Many of these types of organizations buy large amounts of bitcoin over the counter or off of exchanges for principal investment funds, and they describe this experience as problematic.

Yeh said an exchange order in the thousands may not fill, or at the very least would cost a huge premium for customers.

Yeh told CoinDesk:

"If you look at the digital depth chart, which is very unique to bitcoin, for you to actually buy say 3,000 BTC on the market right now, you would end up paying $50 in slippage fees per bitcoin."

Yeh is referring to the depth charts that have been developed to show bid and ask sides of the bitcoin market.

The market depth chart for a bitcoin exchange. Source: Bitstamp
The market depth chart for Bitstamp. Bids are green, asks are blue. Source: Bitstamp

It's a visualization of bitcoin orders which he says is signature to cryptocurrencies.

The more bitcoins purchased, the higher price will rise – and quite steadily when trying to procure thousands of coins on an open market such as Bitstamp.

Yeh also isn't alone in thinking that, despite any price ramifications, the auction presents a prime buying opportunity.

Jaron Lukasiewicz, CEO of bitcoin exchange Coinsetter, said:

"It will be much cheaper to buy bitcoins through the auction than the open market. This is a great opportunity for anyone looking to make a multi-million dollar bitcoin purchase."

Auction price

It is difficult to forecast what price or prices the 10 blocks of bitcoin will go for, but since the auction bids will only be accepted on one day, Friday, 27th June – the market price on that date will likely be a baseline for making bids.

Yeh said he sees the market going either way:

"I think there’s only going to be two scenarios. There’s either going to be a ridiculous premium, or there is going to be a ridiculous discount."

Though prospective investors might obtain large blocks of bitcoin from a government without any sort of exchange or over-the-counter added expense, there may be a premium above the market price of that day.

Source: US Marshals Service
Source: US Marshals Service

Still, some bidders may think buying in bulk at the auction will result in low competition for premium bids.

Taking a gamble by bidding much lower than market value is entirely possible given knowledge the government will profit from the auction regardless.

"If I was bidding, I’d probably [go] with a discounted bid," said Dan Held, a product manager for bitcoin information resource Blockchain.info.

Avish Bhama is the CEO of Vaurum, a bitcoin exchange built for financial institutions. He confirmed that his company is helping at least two bidders in the auction.

Bhama told CoinDesk:

"I do think that the bids will be quite competitive with market pricing, so there will be a rally after the auction."

The second auction

Despite fears of a sizable market reaction, the current auction is just a preview of what may become a larger second auction. Based on the wallet labeled “DPR Seized Coins 2”, the government has control over an additional 144,000 seized bitcoins confiscated from alleged Silk Road mastermind Ross Ulbricht.

Ulbricht sued the US government to protest the sale of the assets, temporarily keeping this large block of coins off the market.

With this total factored in, the government currently has 174,000 BTC in its possession. And with 12,922,425 BTC in circulation right now, the US government publicly owns over 1% of all bitcoin created.

As such, this auction may serve as a sample for how future sales of seized bitcoin will affect its price.

Wallet and circulation numbers are from Blockchain.info.
Wallet and circulation numbers are from Blockchain.info.

However, fears about this larger quantity of coins reaching the market may be overblown, suggested Luria, who has written four research reports on bitcoin for Wedbush:

"Bitcoin trades more than 30,000 BTC a day on an ordinary basis. So the auction only represents one day, or less than that, of trading volume. So [this auction] shouldn’t have that much of an impact."

But, Luria conceded that when the news comes out regarding how much bidders paid for the blocks of bitcoin, it will have an impact on the markets.

"If the auction ends up getting done at a price lower than the market price," he said, "when it's announced, that will probably put a little more pressure on the price of bitcoin. If the auction is done and the price ends up being at a premium, I think that will have a positive impact on price".

Auction gavel image via Shutterstock

AuctionsBinary FinancialSilk RoadUS Marshals Service

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