On June 27 the US Marshals will be auctioning off several large blocks of bitcoin, totaling nearly 30,000 in all. Culled from seizures related to the Silk Road drug/gun marketplace shutdown, the auction itself represents an interesting step in the evolution of how the world defines bitcoin.
An auction of a commodity in which every unit is indistinguishable from another should have an interesting effect on a market that has, until this point, existed without much active government participation and has consistently treated bitcoin as neither currency nor commodity, but a curious hybrid of the two.
Bitcoin as Digital Gold vs. Bitcoin as Digital Cash
The US government, like most world governments, has tended to treat BTC not as currency but as a commodity. Its primary function is not as a means of exchange but as a wealth storage vehicle.
Chalk it up to bitcoin’s tendency to rise in value, much like a fine wine or a parcel of real estate. But certainly not like a fiat currency, which should inflate slightly. The IRS decreed as much in the spring, making bitcoin profits subject to capital gains tax, the same taxes that are accrued by an equities trader after a profitable transaction.
Why does this matter? The government has weighed in on how bitcoin should be regulated when traded between its citizens. Or at least, when its citizens buy and sell bitcoins to whoever is on the other end of the transaction (anonymity being one of bitcoin’s main “selling points”). What the government hasn’t done is participate in that market themselves.
Returning to the auction: the US Marshal’s are sitting on a pile of seized bitcoins. And as the government has always tended to do with assets seized from a drug raid, they’re not flushing them down the toilet. Or virtual toilet, in this case. When the government seizes money, they use that money to fund their programs. When they seize a car, they auction it off. When they seize cash, they use it for their own ends.
The government isn’t “using” the seized bitcoins, of course. They’re selling them off. Like a car. Except in this case, we’re talking about 29,656.513065 cars that are exactly identical in every way.
Sotheby’s This Ain’t
Assets get auctioned off by the government all the time. Then the microcosm of a market, the auction itself, determines the fair price. But this isn’t an auction for a one-of-a-kind item, like a car or painting whose qualities and imperfections are wholly unique to that item.
We’re talking about 29,000+ BTC, divvied into ten blocks. Nine blocks of 3,000, and one of the 2,956 and change. Each and every piece of the block the same.
This should make predicting the outcome of the auction relatively easy. One BTC is equal to one BTC. Or to think about it like USD, one dollar is one dollar.
If bitcoin is truly a currency, this would be like the government just decided to auction off $29,256 in one dollar bills. And go ahead and assume that there is no physical difference in any bill. This is just $29,526 in cold hard cash, available to the highest bidder.
What do you think that would fetch on the open market?
Selling Money to the Highest Bidder
To make the comparison more apt, this would be like selling $29,526 in rupees. Which of course, technically happens all the time in the forex market. But in that case, the auction’s resulting end price would be fairly predictable. Not so in this case.
Bitcoin has a market value, to be sure. As of 1 PM EST on June that was $591.48 USD. It would reason that the nine uniform blocks of 3,000 BTC would auction off at roughly $1.744 million apiece.
Chances are they won’t. Likely, they’ll come in at less, as a serious speculator attempts to turn the BTC blocks for a digital buck. Even just registering for the auction requires a $200,000 USD refundable deposit.
But rich traders buying low on BTC is not the only possible outcome. What will be really interesting will be if the bids come in above market value, indicating the speculators think the auction itself could drive up the global market price and they want to lock in their BTC at a set value.
Or, if the bids do come in more or less exactly at market price, it bodes well for the assertion that, despite the recent bitcoin volatility is approaching some semblance of stability, as a functional currency must do.
The auction is certainly set to be a fascinating event, with roughly 0.23 percent of the total BTC in existence going on the block simultaneously. The government is clearly treating bitcoin as a commodity and is just looking to get their USD. If the market treats it the same –as a thing that can be bartered again “up the chain” for USD, at a profit – it will help shape bitcoin’s position as a virtual commodity. A bar of digital gold, a barrel of electronic oil, a bushel of ones and zeroes.
If the winning bid comes in right at market price, that bodes well for the market’s desires to actually use BTC for one of its unique properties, like transferring wealth across vast distances without transaction fees. That is, use it like a currency. And it would make buying a lot of BTCs sound a lot more like buying a pile of money, and not investing in a plan to eventually make money – in dollars.
Interested bidders must register between June 16 and June 23. Bids will be taken via email, with winners notified on June 30. Further information concerning the auction can be found on the US Marshal’s bitcoin auction announcement.