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Silk Road Auction, and the Impact on Bitcoin Price

The announcement from the US Marshals that they will be auctioning off the bitcoins seized in the Silk Road bust late last year has been the biggest piece of Bitcoin news in the past two weeks. News of this auction has even somewhat overshadowed the massive fear surrounding, the largest Bitcoin mining pool, and its attainment of 51% hashing power. This auction has been the source of much speculation regarding the future of Bitcoin as a whole and the more immediate future of the Bitcoin price. Many predictions and “analyses” have sprung up in recent days, trying to make sense of what the US Marshals’ auction will mean for the Bitcoin price. I even advanced my own analysis (which I like to think uses a much more sound methodology than the positivist trend analyses on Reddit and the various Bitcoin news websites) regarding the recent events related to a significant drop in the Bitcoin price, and how the auction will affect that downward trend– which has since flattened out.

A Summary of my Previous Bitcoin Price Analysis

In my analysis, I explored major events happening both inside and out of the Bitcoin community and how they contributed to the drop in Bitcoin price. We discovered an interesting relationship between the Bitcoin price and the American stock market, as both reacted similarly to news coming out of Iraq. It appeared that the Bitcoin markets had become, at least temporarily, linked to the mainstream stock market in the US. I believe the cause for this connection came from the Dish Network announcement, which likely brought in some money from mainstream traders, which would have definitely connected the Bitcoin markets and the mainstream trading markets. Additionally, the announcement of the Silk Road Bitcoin auction was responsible for a significant drop in the Bitcoin price, which occurred over the span of just a couple hours. I combined these two pieces of data with the catalyst of the Bitcoin price decline– the fear– to form a sound explanation of the drop in Bitcoin price that lasted for the better part of a week.

I stated in my analysis that the price would flatten out, and possibly increase slightly, until the Silk Road auction at the end of June. So far, my analysis has been correct. The Bitcoin price has remained within a range of $580-$610 since my analysis was published on Coin Brief. Although the Bitcoin price has not increased slightly as I speculated, I maintain that my analysis has been correct since I only mentioned that as a possibility.

The analysis ended with my statement that the auctioning off of the Silk Road bitcoins would inevitably depress the Bitcoin price. I assumed that the bitcoins would flood the market, thereby increasing the supply, and decrease the Bitcoin price. This scenario remains a possibility; however, given the surfacing of some additional pieces of news, it appears that the auction may not have a significantly negative impact on the Bitcoin price.

Recent Developments and their Implications for the Silk Road Auction

In a grand display of incompetence on the part of the United States Marshals, a list of approximately 40 people interested in the auction was accidentally made available to the public. In emailing the people on this list, giving them information about the auction, the person from the Marshals that sent the email accidentally sent a carbon copy of the email to everyone on the list, instead of a blind carbon copy. This mistake made the names visible to everyone who got the email, and someone took a screenshot of the names on the list, which then made its way throughout the Bitcoin community. On this list of possible auction participants were many executives from prominent Bitcoin companies and executives of investment firms. This piece of information suggests that the people interested in buying theSilk Road bitcoins are not people who are looking to make mundane purchases with them. The investment firms are obviously looking to hold the coins as an investment. And the Bitcoin company executives could either be looking to hold them for themselves or are investing in them so that they can be used to enhance the services their companies provide. Plus, the sheer amount of money being spent on this auction strongly suggests that the winner(s) of the Bitcoin auction are expecting long-term gains on their investments. No one is going to shell out $200,000 just to get in the door of this auction so that they can immediately spend the bitcoins on sushi.

The leaked list of names of people interested in this auction makes it fairly clear that whoever wins these bitcoins will likely hold them for a very long time, hoping to see the market price go much higher than what they paid for in the auction. Therefore, the auction could very well have no immediate effect on the Bitcoin price. We will only see shifts in the Bitcoin price when these auctioned coins start moving through the Bitcoin economy, when the auction winner(s) start buying goods with the bitcoins or sell them for fiat currency.

However, an announcement from SecondMarket, a Bitcoin company that will be bidding on the Silk Road bitcoins, could increase the likelihood that the auctioned coins hit the market sooner rather than later. The company will be allowing certain customers to make individual bids that will go into an aggregate bid, which will then be advanced in an attempt to buy at least some of the Silk Road bitcoins. If SecondMarket wins any of the coins, they will be distributed between the individual bidders, most likely proportionate to the amount they contributed to the aggregate bid. By lowering the capital threshold for the auction, much smaller amounts of bitcoins will be distributed from the total pot being auctioned by the Marshals. Since the investments in these bitcoins will be much smaller, there is a slight increase in the likelihood that the bitcoins will be moved faster, thus depressing the Bitcoin price. But, the minimum contributions set by SecondMarket are $25,000 and $50,000, depending on what kind of payout the contributors are looking for. That is still a substantial sum of money, and the bitcoins will have to be held for a while before bidders see a return on their investments. So while the chances of the coins being immediately dumped may be slightly increased, it still seems more likely that they will be held.

A Slight Modification of my Bitcoin Price Analysis

What does this mean for the future Bitcoin price? Aside from some panic selling during the auction, the Bitcoin price should not be significantly depressed once the auction is over. 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.

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.

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2 comments on “Silk Road Auction, and the Impact on Bitcoin Price”

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    1. I agree, that’s why I felt that I had to write this article to modify my previous analysis because that fact didn’t occur to me until after my initial analysis was published. I learned of the auction and immediately thought: selling=decrease in price; clearly that isn’t the case with an auction such as this.

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