How the USMS auction will affect Bitcoin prices

The Auction

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As you most likely already know the USMS is going to auction off exactly  29,656.51 BTC on June 27th of 2014. The coins were obtained from the seizure of the SilkRoad. There will be 9 blocks each of 3,000 Bitcoin and the remained which will be offered in the auction. The coins in this auction are the ones that belong to the site SilkRoad and not to any of it’s operators, the 140,000 BTC that were siezed from Ross William Ulbrich are NOT going to be in the auction.

Impact of the auction – morals and fungibility

The auction questions the morality of pre-trial asset forfeiture since SilkRoad has not been tried yet. Furthermore, the USMS auction will establish the first governmental precedent for bitcoin fungibility, meaning that it will establish the idea that every bitcoin is equal as a unit.

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The bitcoins sold by the federal government hold no restrictions to their further use. That may be a trap that the government had fallen into. You see by allowing the sale of “blacklisted” coins with no further restrictions will make it harder for the government to prove in bitcoin related cases whether the coins really belonged to the person. A set of blacklisted coins could be spread around the network and “cleaned up” simply by being transferred to a new address or broken up.

The auction notice reads:

“The USMS will not answer any questions regarding (a) the associated criminal or civil cases that resulted in the seizure of the bitcoins being auctioned, (b) Bitcoin characteristics, uses or value, or (c) specifics of the auction process other than information provided in these documents;
The USMS will not sell to any person who is acting on behalf of or in concert with the Silk Road and/or Ross William Ulbricht, and bidders will be required to so certify;
The USMS will not transfer bitcoins to an obscene public address, a public address apparently in a country restricted by the Office of Foreign Assets Control (OFAC), a public address apparently associated with terrorism, other criminal activities, or otherwise hostile to the United States;
The winning bidder will receive a signed Bill of Sale from the United States Marshals Service prior to the transfer of the bitcoins.”

None of the above statements carry any indication the the USMS view these coins to be legally different than any other coins. In a way, the USMS is trying to maximize the return from the Bitcoins by not disrupting their implied fungibility.

Impact on exchange prices

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There are a couple different views as to how the auction will affect the market price of bitcoin. Take a look at this article:

/speculation/bitcoin-nears-600-again-buy-or-sell/

There we discuss how the news of the auction affected the market price back when it just first came out. There was also some advice as to what to do if you are trading bitcoin or litecoin.

Here is what reddit has to say about the auction, Regarding the auction, remember this: Every losing bid will belong to a very wealthy entity that still wants thousands of coins.

One good point that is brought up is that the person who gets the bitcoins essentially got it off-market. Meaning that he was able to obtian a large amount of coins without disrupting the market, so in the end depending on what he will do with the coins that is where the market will go.

If we had a scenario where we knew that a buy order would be initiated on an exchange we would be able to make better predictions as to what the market price would be. However, because the auction is “off the book”, the market will sway towards what the winner does with the coins.

Not only do we need to make a prediction as to whether the winning bidder will hold or dump the coins, but we need to make a prediction whether the coins auctioned off will sell under the market price, at market price, or above market price.

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Most likely the coins will be sold at either the market price or above market price. Here is the tricky part, if the coins are sold at a substantially lower price than the average market price than it will be more likely that the bitcoin price will drop because there would be a bigger incentive for the buyer to quickly dump the coins and make a profit.

On the other hand, if the coins are sold close to the market price then we will not see any huge effect on the price. BUT another point comes into play. Even if the coins are sold at market price, the bidders who lost would still want to get in on the action and might initiate high volume buy orders on exchanges. This will shoot bitcoin to the moon.