Bitcoin Price Analysis: Citi Report and Silk Road Auction

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As we in the Bitcoin community all know, today (June 27, 2014) the US Marshals will be auctioning off 30 thousand of the bitcoins that were seized in the Silk Road bust late last year. This auction has been the subject of much speculation and analysis in the past two weeks, with lots of controversy arising out of the Marshals’ hilarious display of ineptitude when they accidentally sent an email to a list of approximately 40 bidders as a carbon copy email rather than a blind carbon copy. I myself even put forth a Bitcoin price analysis, which examined recent events and how they impacted a drop in the Bitcoin price. Included in my analysis was the US Marshals’ Bitcoin auction and how it would affect the price. A few days later, I wrote an article making a very minor revision to my analysis in regards to how the Auction would impact the Bitcoin price.

“In conclusion, my predictions for the impact this auction will have on the Bitcoin price have gone from inevitably downward to uncertain, with a likelihood of a continuance of the sideways trend or an upward turn in the Bitcoin price. I maintain the rest of my analysis as solid, however; the Bitcoin price will likely remain flat until the auction, and we will see what happens after that.”

My predictions for prices leading up to the Silk Road auction have been very accurate. The sideways trend has persisted, with a slight deviation from that trend yesterday, which was likely due to panic selling in anticipation of the auction.

“Either this sideways trend will persist, given a slight deviation due to panic selling, or the Bitcoin price will turn upwards in anticipation of positive news coming from the winner(s) of the Marshals’ Bitcoin auction.”

Citi’s Bitcoin Price Prediction

However, a major United States based financial institution has released a report that makes the exact opposite prediction of my price analysis. Coindesk reported this morning that Citi Group, an American bank holding firm, has made their own Bitcoin price analysis regarding the Silk Road auction. It appears that Citi believes that the Silk Road auction will most definitely exert a heavy downward pressure on the Bitcoin price, possibly making it “hit bottom.”

“Normally, we would expect the price to hit bottom around the time of the auction or soon after.”

In my opinion, the predictions regarding the price coming from Citi could not be further from what will likely happen in reality. I hold this opinion for a few reasons. The biggest one being that it appears as if Citi does not really understand how the auction is being conducted. They seem to think that the auction will somehow be taking place on the markets, being sold on an exchange. See this quote from the Citi:

“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.”

It looks like they are assuming that the bitocins will be dumped into the market as they are being auctioned off. Further evidence from the report gives even more of a confirmation to my suspicion. See this quote from the Coindesk article:

“Citi also points out that the auction takes place between 6am and 6pm EDT, so any bidder will have to consider possible price fluctuations.”

So Citi expects the Bitcoin price to fluctuate in response to the auction as the auction is taking place. The only way that could happen is if the coins were being sold on an exchange, but we know that isn’t the case. This auction is being conducted off the market, and the bitcoins will be transferred directly from the US Marshals’ wallet to the wallet(s) of the auction winner(s). Plus, the market already looks like it will disprove Citi’s statement, that prices will plummet during the auction. The price has already gone back up to the high $590s range, recovering from a drop to $560, and even hit a high of $599. Therefore, it appears evident that the auction itself is having no negative impact on the Bitcoin price. The only price fluctuations that this auction will produce will come from panic selling, which will exert downward pressure on the Bitcoin price, or speculative buying coming from anticipation of good news from the auction winner(s), which would of course increase the price. As far as the coins actually being auctioned are concerned, they will have no direct effect on the price until they hit the market. This brings us to Citi’s next prediction, which states that the Silk Road coins will be bought below the market price.

Will the Silk Road Coins Sell Above or Below Bitcoin’s Market Price?

Whether or not the Silk Road bitcoins sell above or below the market price is very important in determining the likelihood of the coins hitting the market immediately or if they will be held for an extended period of time. If the coins go for a price below the market rate, then the winner(s) will have made an instantaneous profit just from buying the bitcoins. Thus, there will be an incentive to sell them for fiat or buy consumer’s goods with them to take an advantage of the discrepancy between the price that they paid on the auction and the market price. But, if the bitcoins are auctioned of at a price higher than the market rate, then it would make no sense to dump the coins immediately. If the auction participants are willing to pay market price, which I think they are, then they are most likely planning on holding the coins for a very long time, anticipating a long-term appreciation in the Bitcoin value. If they are held, then obviously they won’t have a direct impact on the Bitcoin price. However, Citi believes that the Silk Road bitcoins will certainly be sold below the market price:

“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.”

I, of course, disagree and I believe that the Silk Road coins will be sold above market price. And I think that Citi’s statement that “it is hard to buy lumpy amounts” of bitcoin serves to support my prediction rather than Citi’s. It is hard to buy lumpy amounts of bitcoins on the market, that is true. Certainly, 30 thousand bitcoins can be considered a “lumpy” amount. So it makes perfect sense why these bidders would want to pay above the current market price for these bitcoins; if they fully expect the Bitcoin price to go much higher than it is right now, they want to buy a huge amount at the current price so that they can profit off the future Bitcoin value appreciation, but they can’t buy as much as they would like on the market. The Silk Road auction seems like the perfect place for these bidders to get the large amount of coins that they want. They can’t just “buy it in the market in bits and pieces” because that would incrementally drive up the price, defeating the purpose of buying the coins in the first place. With the auction, they can buy a bulk amount all at once without disturbing the Bitcoin price, aside from some panic selling or speculative buying. Furthermore, if the bitcoins sell above the market price like I expect they will, the winner(s) will have to hold if they want to make a profit. While they are holding, more bitcoins will be mined daily, thus increasing the supply. This increase in supply will reduce the impact the Silk Road coins will have on the Bitcoin price when they finally hit the market. So, overall, I expect this auction to have a minimal long-term effect on prices, given that the coins sell above the market rate.

Of course, the results of the auction won’t be fully known until the auction is over and the bitcoins start moving. I will, however, maintain the prediction in my previous analysis: the auction will likely not exert a downward pressure on the Bitcoin price and either the sideways trend will persist, given the deviation we experienced yesterday due to panic selling, until something else disrupts the trend or anticipation of good news from the winner(s) of the auction will increase the price.

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