At the end of the Silk Road

Saturday 21 June 2014

The US Marshals Service are publicly auctioning 30,000 bitcoins seized during an FBI raid of the Silk Road last year. This is a hugely significant event, for a number of reasons – though perhaps not why you think.

Silk Road bitcoin auctionBack in October 2013, Federal agents arrested Ross Ulbricht, alleged owner of the black market auction site known as the Silk Road. They took control of accounts containing nearly 30,000 bitcoins – then worth a fraction of their current value – as well as another 144,000 bitcoins belonging to Ulbricht himself.

The US Marshals Service (USMS) is now auctioning the confiscated coins. The sale will take place on 27 June. The coins will be sold in nine batches of 3,000 and one of 2,657. Prospective buyers are required to register with USMS by Monday 23 and send a refundable deposit of $200,000, so this isn’t for casual bidders. (Ulbricht’s own stash still tied up in legal wranglings, but it’s entirely possible they will eventually see the light of day and end up under the gavel, too.)

Initial reaction
When news of the Silk Road auction emerged, the initial reaction from many bitcoin holders and traders was one of dismay. 30,000 coins with an approximate current value of $18 million, suddenly coming onto the market all at once. Simple supply and demand suggested a drop in price could be the only result. The market appeared to agree, coming off its recent highs and dipping back below the $600 mark. But this is not necessarily an accurate reading of the situation.

Firstly, 30,000 bitcoins is not so many. Remember, some 3,600 bitcoins are mined every day, so this represents just eight days’ supply. And this is all happening off-exchange. Of course, if a buyer does manage to secure a bargain price, they might transfer their coins to an exchange and sell to make a quick profit, but that is hardly likely. A single batch of 3,000 coins would cause significant slippage: it would be impossible to have the order filled at market price all at once, resulting in the seller having to settle for lower prices – perhaps much lower. It’s just not worth the risk. In any case, anyone who goes to the trouble of buying 3,000 at auction from the US government is probably a long-term investor rather than someone interesting in arbitraging for quick profits.

Secondly, this misunderstands the relationships between the state of the market and news. There’s a popular perception that news shifts the market: ‘good news’ increases prices, ‘bad news’ is bearish. This is not quite true. Perhaps it would be more accurate to say that news gives the market an excuse to go where it wants to anyway. In this case, bitcoin was badly overbought in the short term, trading at the top of its range. The order book was wafer thin, so any large buys or sells had the potential to affect prices significantly – which is exactly what happened. The dip was an understandable correction after some premature post-bear market elation. The Silk Road story just gave sellers permission to push the button their fingers were hovering over anyway.

Legal coins
The real impact of the Silk Road auction is not its effect on the market, whatever that might be. It’s something quite different.

What the auction does is confer legitimacy on a specific tranche of bitcoins,

and by implication on bitcoin more generally.

The US has already made various regulatory statements about bitcoin, treating it as legal but not exactly embracing it. (The tax position is rather more awkward than many owners would like, since it treats bitcoins as property on which capital gains tax is payable. If you’re an early adopter who cashes out or, worse still, uses your stash to buy goods on a regular basis, that’s a real headache.)

Additionally, the Gox scandal and others raise the question of whether stolen coins should or will be returned to their rightful owners.

But here are 30,000 bitcoins, and every single one of them is unquestionably legal and above board. They have to be, because the USMS is selling them. The fact that the vendor is the US government confers a legitimacy on them that is available from no other source. One of the repeated criticisms of bitcoin is that criminal activity is rife and coins are stolen too often. Well, these coins have been laundered in a way that no other organisation could ever hope to achieve. They are, by definition, pristine. There’s a message to respectable investors in big, neon letters:

Here are bitcoins, that mythical asset you have heard so much about. But this time, they are free from any ethical or legal questions, and you can buy them from a source who won’t threaten to disappear and leave you with a blank website and empty pockets.

It’s an attractive prospect. (And, as an aside, can you imagine the US backtracking on any of its legislation to date, or introducing new regulations to hamper the adoption of bitcoin and make it harder for people to use – thereby devaluing public property they had just sold?)

Big names
Finally, as if to confirm the theory, there are the identities of some of the potential buyers. We don’t know who will actually be bidding for those 30,000 coins. But, thanks to an email error, accidentally leaked by the US Marshals Service, we do have a list of names of parties who have expressed an interest. The Coin Desk article contains a few eyebrow raisers and includes a few names that won’t ring any bells, and some that won’t be a surprise – such as representatives from SecondMarket, the US firm known for buying and selling illiquid assets, and those from high profile bitcoin businesses. But take another look. There are also lawyers, a professor and executives from various banks and investment funds.

The USMS recognised their mistake and quickly sent out an email confirming that this was not a list of those intending to bid. It was a list of some of those who had asked questions about the auction. Given the nature of the names on the list, it will be interesting to see where those 30,000 bitcoins will find their new home – and what the unsuccessful bidders will decide to do next.

Brandon Hurst

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