Last week’s revelation that the US government has transferred a substantial $300 million worth of Bitcoin (BTC) linked to the Silk Road has sparked some unease among crypto traders . This news instantly cast a shadow over the market, dampening the optimism fueled by the earlier release of US CPI figures.
As I scrolled through Twitter, I noticed that many crypto traders seemed unaware of the US government’s significant BTC holdings, which currently stand at an impressive 205,514 BTC. Valued at approximately $5.6 billion, the US government actually holds more BTC than Michael Saylor’s Microstrategy. Naturally, this has led to speculation about the government’s intentions and the potential impact on the generally volatile crypto market.
In this post, I will explain how the US government acquired these BTC, shed light on their plans for the BTC, and share my thoughts on whether it will have a big impact on the markets.
Understanding the US Government’s BTC Holdings
The US government has amassed a considerable number of BTC through various means, including seizures, forfeitures, and confiscations during criminal investigations. Two criminal investigation events stand out in contributing to their significant BTC holdings.
#1. Silk Road
Silk Road, an illicit online marketplace that operated from 2011 to 2013, gained notoriety for facilitating illegal trade, particularly in drugs. This platform relied on cryptocurrencies, especially BTC, as a means of anonymous payment.
In October 2013, the FBI dismantled Silk Road and apprehended its founder, Ross Ulbricht. During the subsequent investigation and trial, the US government seized a significant number of BTC associated with Silk Road. Approximately 144,000 BTC were confiscated from Silk Road’s servers. To sell these seized assets, the US Marshals Service conducted a series of public auctions between 2014 and 2015 .
However, another twist in the tale emerged with the case of James Zhong, a hacker who had stolen 50,676 BTC just before the FBI could take down Silk Road. Zhong managed to evade authorities for a decade. It was only in 2021 that Zhong was finally caught, and his BTC were seized by US authorities in November 2022 .
In August 2016, Bitfinex, a prominent crypto exchange, fell victim to a security breach that resulted in the theft of approximately 120,000 BTC . Exploiting a vulnerability in Bitfinex’s system, hackers managed to gain unauthorized access to user accounts and subsequently withdraw the stolen funds. The value of the stolen BTC at the time was estimated to be around $60 million, accounting for 1/6th of the total trading volume on the exchange.
In response to the incident, US prosecutors charged individuals suspected of involvement in laundering the stolen crypto. As part of their legal proceedings, US authorities were able to confiscate approximately 94,000 BTC in 2022, which was valued at over $3.6 billion at the time of seizure.
What is the US government planning to do with their BTC?
Regarding the 50,000 BTC seized from James Zhang in November 2022, the US government has already sold a portion of it. In March, they successfully sold 9,861 BTC for $216 million. Notably, the US government has opted to use Coinbase to directly sell the BTC on the open market, departing from the auction-based approach used in the past. Their plan is to sell the remaining 41,000 BTC in four equal batches throughout this year. Last Wednesday, the US government-controlled wallets moved a total of 9,825 BTC, equivalent to $301 million. This has led to concerns in the market that the next batch from the remaining 41k BTC might be unloaded soon.
As for the BTC seized from the Bitfinex hack, it is highly unlikely that the US government will return the 94,000 BTC to Bitfinex due to the regulatory and potential criminal issues surrounding the company. Bitfinex has managed to recover only small numbers of the stolen BTC so far. In collaboration with the crypto exchange Poloniex in 2021, they were able to retrieve 6.5 BTC worth $305,000 at the time. In February 2019, Bitfinex reclaimed another 28 BTC worth over $107,000 from the US government. And just last week, Bitfinex received an additional $315,000 in cash and crypto from the United States Department of Homeland Security to return to its users. However, this amount does not come close to the 94,000 BTC that the US government seized.
There are some who speculate that IF the US government is allowed to keep the BTC, they may choose to keep these BTC as a hedge against inflation. However, this seems unlikely as there is currently no established law or policy in the US regarding the treatment of seized BTC. Therefore, it is highly probable that the government would adopt a similar approach to selling the seized BTC as they did with the Silk Road-linked BTC, i.e. selling them in batches on the open market.
How these plans will impact the crypto market?
Let’s begin by first addressing the Silk Road-related BTC. As mentioned previously, the US government still possesses 41k BTC seized from James Zhong, which is planned to be sold in four batches throughout the year. Market participants remain wary about the potential impact of these BTC being introduced to the market.
In recent instances, erroneous reports from Arkham caused notable drops in BTC price. On April 26, false claims were made regarding significant BTC movements from wallets associated with the US government and the now-defunct crypto exchange Mt. Gox. This led to an 8% drop in the price of BTC . Similarly, on May 10th, another false report about US government-linked crypto wallets resulted in a temporary 4% decrease in BTC price . However, these dips recovered, with the price ending the day with just a 1% decline.
Interestingly, last Wednesday it was confirmed that the US government-owned BTC did indeed move. Surprisingly, the markets did not respond with a significant impact. There was some fear, uncertainty, and doubt (FUD), which instantly dampened the joy the markets experienced after receiving better-than-expected CPI numbers. However, BTC only experienced a modest 0.8% fall, reaching $30,480, and it quickly recovered thereafter.
This observation leads to two conclusions:
- The crypto markets are incredibly inefficient. As the information is public, the news around the selling of Silk Road-linked BTC by the US government should have already been factored into prices. However, with each new announcement, the market still continues to react. However!
- The FUD is clearly losing strength as it’s increasingly priced in. In my experience, crypto traders demonstrate resilience to repeated FUD. This resilience has been evident in past instances, such as when the Securities and Exchange Commission (SEC) initiated regulatory proceedings against Binance. Despite the initial negative sentiment, the markets rebounded and not only recovered, but even pumped when Coinbase also faced legal challenges.
Considering that this has been the third occurrence of the same FUD affecting the market, it is likely that the impact of the US government’s Silk Road-linked BTC sales will be more determined by the actual selling itself rather than the anticipation and fear surrounding it.
So, how much does the actual selling affect the markets? Although market liquidity remains relatively low compared to 2021, BTC remains the most liquid cryptocurrency. When the US government previously sold 9,861.17 Silk Road-linked BTC on Coinbase, BTC experienced a 2.2% increase for the day. Furthermore, it did not encounter a significant drop throughout the day. This demonstrates the market’s ability to absorb such sales.
Therefore, I believe that the market will gradually become less sensitive to the selling of the remaining Silk Road-linked BTC, and the actual selling of BTC by the US government can be adequately managed due to the market’s liquidity.
Predicting the impact of BTC seized from the Bitfinex criminal investigation on the markets is more challenging. If the US government gets to keep them, the market’s initial reaction will most certainly be one of fear due to the anticipation of eventual selling. Similar to the Silk Road-linked BTC, it is the anticipation of selling that generates FUD. However, I believe that as a result of the recent selling of Silk Road-related BTC, crypto traders will in general become insensitive to headlines involving the combination of keywords “US government” and “BTC”. Therefore, I wouldn’t be surprised that future potential FUD surrounding Bitfinex-related BTC may diminish with each announcement related to the Silk Road-related BTC.
As such, the critical factor to consider in this case will then also be the impact of actual selling. Several variables come into play, including timing, market conditions, liquidity, and the size of the batches in which the BTC will be sold. If the US government were to also sell the Bitfinex-related BTC in yet again five batches, they would have double the number of BTC to sell per batch. However, you have to keep in mind that the US government’s objective will be to maximize the revenue from these sales. As a result, they are likely to carefully consider the variables mentioned earlier and make adjustments to their selling strategy accordingly, aiming to minimize market disruption.
My final thought
I understand people are worried when they learn that the US, not exactly the most crypto-friendly nation at this moment, holds a significant number of BTC. But I believe we should look at the situation in a broader perspective.
Regarding the FUD, it is essential to consider the broader market dynamics, news, and developments that influence the crypto landscape. There are promising developments on the horizon that contribute to a positive outlook for BTC and the crypto market as a whole. For instance, the filing of BTC ETFs by financial institutions like BlackRock and the recent news of Ripple’s victory against the SEC are incredibly bullish indicators. These factors create a favorable environment and may help counterbalance FUD concerns related to government-owned BTC.
In terms of the actual sale of BTC, the US government has already sold its first batch of BTC on the open market. The market demonstrated resilience and the capacity to absorb such sales. Better yet, the price of BTC didn’t even dip!
While the government-owned BTC may occasionally reappear on our Twitter timelines, I don’t believe they will ever trigger a black swan event that drastically impacts the price of BTC and other cryptocurrencies. Perhaps, after a brutal bear market where almost everything seemed to cause another market downturn, we just can’t help but worry.
About the Author
Kevin Van Dorp Co-founder of CoinScouts.io
I have experience in marketing and project management within the blockchain industry. Previously, I worked as a marketer for Woo Network and served as a project manager for several blockchain projects, including Gamee (Animoca), Chiliz, Pastel Network, Alium, MyDeFiPet, and Seascape. Currently, I am passionately involved in a pet project called CoinScouts. The primary goal of CoinScouts is to provide traders with better information and insights about different projects in the cryptocurrency space.