Coindesk reports that Citi’s Steven Englander has warned of downward pressure on Bitcoin (BTC) prices in a research note, due to the U.S. Marshals Service auctioning of Silk Road’s Bitcoins. The auction took place this past Friday and winning bidders will receive their bitcoins in July.
Citi’s foreign exchange division, CitiFX, assessed that the approximately 30,000 bitcoins from the auction can flood the market with excess supply, leading to downward pressure on the price. They estimate that the quantity represents about 40% of the 24h traded volume. One section of the research note reads:
“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.”
Is the market efficient?
A prerequisite to any market efficiency is that its participants have equal access to relevant information. News of the auction emerged around June 15. It may or may not be connected to a sizeable correction in Bitcoin prices which was taking place. BTC was caught in a trough, trading as low as $545 on BTC-e, and the lowest level since the final leg of its rally one month earlier. Note, however, that the decline is widely believed to have been motivated by fears from Ghash’s achieving 51% of the hashrate.
Following that scare, BTC bounced off its lows and has proceeded to hover around $580. Traders appear not to be worried about fallout from the auction thus far. Assuming the market is somewhat efficient (perhaps a big assumption in crypto trading), nothing major should change if/when the bitcoins make their way into the market.
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Will the market get flooded?
The next question is if circumstances will change once the auctioned bitcoins actually find their way into the market. Such predictions can be a tough call. The market was aware of the coming expiry of lockup periods for blockbuster IPO’s of Facebook and Twitter. The lockup period is designed to prevent the market from getting flooded immediately after the IPO. Months later, however, hundreds of millions of shares of the two companies flooded the markets post-lockup. Facebook escaped largely unscathed, while Twitter lost over 17% in the first day. Twitter’s volume was multi-fold its average values, a clear indication of over-supply. A month and half later, Twitter recouped all its losses as volumes returned to normal.
Advance knowledge won’t protect you, at least if you’re a short-term trader, if the market participants want out as quickly as possible. Other factors have to be considered.
The figure of 30,000 BTC being 40% of the total 24h volume does seem a bit high. At the time of this writing, bitcoinity.org summarizes the total market volume as roughly 100,000 BTC. The 30,000 BTC then translates into 30% of the total volume, and this is all in the thick of very light weekend trading. Typical volumes are usually considerably higher.
Then again, we’ve pointed out that nobody can say for sure how much of the volume on Bitcoin exchanges is genuine. Indeed, if Citi turns out to be correct, it could expose some major shortcomings in the data relayed by major exchanges.
Their biggest assumptions are that that the purchased bitcoins will (a) make their way onto the market in the near future, and (b) they will do so in a very short time span. It is difficult to understand on what grounds these assumptions were made. This is especially true since the major auction participants, as inadvertently revealed by the Marshals, include major players like SecondMarket and Pantera Capital. It is likely that big firms, which are big believers in Bitcoin and so heavily vested into its future, will not be dumping it right away- if at all. In cases where large firms are bidding on behalf of multiple smaller clients, the odds of them all dumping their bitcoins at the same time are minimal as well.
They also cite barriers to auction entry, such as the $200,000 deposit. This would limit the number of participants and supposedly drive down the price out of a lack of demand. However, considering that any player can easily buy the bitcoins in the open market, there is little reason why the the final price should markedly differ from that of traditional venues.