Midway through last month the United States government dumped a whopping 9,861 in seized Bitcoin — worth roughly US$215 million (AU$318 million) — on the crypto market. Now, crypto investors are bracing themselves for the sale of a little more than US$1 billion (AU$1.5 billion) worth of Bitcoin (BTC) over the course of this year.
Now, in case you’re wondering why on earth the US government is selling massive sums of Bitcoin — it comes from the staggering 50,000 Bitcoin seized when US authorities arrested James Zhong in November last year after he pleaded guilty to stealing the cryptocurrency from the infamous dark web marketplace Silk Road.
For those interested in how James Zhong stole and then held this massive amount of Bitcoin in secret for more than 10 years — which is especially impressive considering it was valued at US$3.36 billion (AU$5 billion) at its peak — the following Twitter thread from pseudonymous Twitter user ‘FractalEncrypt‘ does a great job at breaking down the gritty details.
According to the court filing associated with Zhong’s Sentencing Memorandum, the remaining 41,000 Bitcoin (valued at US$1.1 billion [AU$1.3 billion] at the time of writing) are “expected to be liquidated in four more batches over the course of this calendar year.”
This means that investors need to prepare themselves for what happens when four more ‘tranches’ of Bitcoin are unloaded onto the market. The word ‘tranche’ is simply financial jargon for ‘a portion of an asset’, and in this scenario we’re talking about four lumps of 10,250 Bitcoin.
Bryan Ventura, a senior lawyer specialising in Web3 and the chair of BlockchainNZ told The Chainsaw what typically happens when massive sums like this are unleashed on the market.
Ventura explained how the principles of supply and demand dictate that when massive amounts of any asset hit the market, investors can reasonably expect to see a temporary decline in price.
However, Ventura adds that because the demand for Bitcoin has been increasing drastically since the beginning of this year, it may not actually have a significant impact on markets.
“Bitcoin’s recent bottom of US$19k arrived the day before the US government sold it’s first tranche of Bitcoins on March 14. Bitcoin has now shot up to US$28k,” Ventura said. “I’d expect to see similar short-term selling pressure leading up to each tranche sale.”
“However, it’s important to note that Bitcoin is trending bullish this year and seems to be fully supporting its inflation hedge thesis. I think demand will far outweigh this new supply,” Ventura added.
Crypto investors await the Federal Reserve’s stance on rates
Aside from the US government releasing enormous volumes of Bitcoin onto the market, the next big thing that crypto investors are watching closely is what the US Federal Reserve will do with interest rates at their next Federal Open Market Committee (FOMC) meeting in May.
Speaking to Bloomberg, Jonathan Millar, a senior economist at Barclays explained that the Fed now has to walk the tightrope between managing inflationary pressures and ensuring that major US banks don’t go belly up.
“The difficult thing for the FOMC at this meeting will be the tension between bringing down inflation and financial stability risks,” Millar said.
With investors hopeful that the Fed may pause interest rate hikes due to the banking crisis, the overall appetite for risk has once again increased. It’s worth noting that when the Federal Reserve raises interest rates, investors typically look to take their money out of ‘risky’ assets like cryptocurrencies and growth stocks in favour of more ‘conservative’ assets like treasuries and bonds.
Essentially, if the Fed hikes rates it spells bad news Bitcoin and the rest of crypto. However if they choose to hit the pause button, then it looks like crypto could be firmly back on the menu.