The Breakdown - The US Gov't Selling Silk Road Coins

Episode Date: April 4, 2024

Some coins seized in connection with Silk Road have been sent to Coinbase for sale. NLW explores how much people should be worried about the US dumping their BTC stash. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, April 3rd, and today we are talking about the U.S. government selling its Silk Road coins. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to Bit. slash breakdown pod. Hello, friends. Well, as you can hear, I am a bit better today, but still recovering. My voice is still a bit of a wreck. But the world moves on. Bitcoin keeps cruising, and that means we have a show to do. Where we begin is with an interesting topic, Bitcoin seized by the U.S.

government is on the move. A wallet containing $2 billion worth of seized Bitcoin was moved on Tuesday. 1,999 Bitcoin worth around $139 million was transferred to Coinbase Prime, presumably to be sold. The balance of around 29,000 Bitcoin was consolidated into a fresh wallet. Back in January, the government filed noticed that they would be selling around $130 million worth of Bitcoin, so this could be the culmination of that previously announced sale. And here it is worth being very clear on this, as there are many misleading headlines and panic across crypto Twitter. This sale was only 139 million in size, and there's no expectation that large government

sales will happen without notice. The Bitcoin in this government wallet was seized from James Zong back in 2021 and has been identified as the proceeds of a 2012 Silk Road hack. This is the notorious case where a hardware wallet was discovered stashed away in a popcorn tin. Zhang was convicted of wire fraud in 2022, and the government had already sold almost 10,000 Bitcoin seized from him in March of last year. The government had originally announced plans to sell this Bitcoin in quarterly installments

over the past year, but no sales occurred in that time. Overall, the government still has over 200,000 Bitcoin obtained from sales. seizures, worth over $13 billion at current prices. Most of these funds are still waiting for criminal trials to conclude and forfeiture orders to be finalized, so they aren't likely to be sold in the short term. The largest seizure was from the arrest of the Bitfinex hackers at around $95,000 Bitcoin. The Bitfinex hackers have pled guilty but are still awaiting sentencing. There's also a chance that Bitfinex will make a claim for the stolen funds to be returned rather than it being sold off. Many credited price action on Tuesday to this movement of

government Bitcoin. But checking the tape, there was very little market action around the time that the government Bitcoin was transferred. Price was relatively stable at around $65,000 for most of the day, although volatility was quite high. Still, panic was noticeable across crypto Twitter that the U.S. government was about to dump a massive Bitcoin bag. Several crypto veterans, however, had a less alarmist take. Byzantine General wrote, The Silk Road U.S. government coins fud is literally just fud. The government doesn't slam market sell on public order books. If it's getting sold, it either already or will be sold OTC or auction. Investor Adam Cochran echoed that take, tweeting, if the government is moving $2.1 billion in BTC and not doing an auction, then it's likely

already sold or going to custody. DoJ isn't going to yeat the stack in a single candle. Galaxy Digital head of research, Alex Thorne, seemed fairly confident that the sale was limited to the roughly 2000 Bitcoin that were transferred to Coinbase. He noted that this looked like an OTC sale that took place on Monday night being settled in the morning. The reality is, is that we are not likely to simply wake up one day to find the U.S. government liquidating billions of dollars with Bitcoin without telling anyone. There's a lengthy notification and legal process surrounding these sales. They just don't happen overnight. Still, some of the commentary was great. Daniel Got Hitz writes, I can't think of anything more bullish than the U.S. government

revenge selling their Bitcoin while they hold tears back at these ETFs being approved. Next up, let's move to a bit of Bitcoin skepticism, this time from Goldman Sachs. Although Bitcoin has experienced a credibility boost on Wall Street, there are still notable. holdouts. One example on that list is Goldman Sachs, where Sharman Mosovar Rahmani, who has spent 23 years as the CIO of Goldman's wealth management division, still thinks crypto is nothing more than a means of speculation. Comparing crypto to the tulip mania of the 1600s, she said, we do not think it is an investment asset class. We're not believers in crypto. Reaching for a very tired trope, she claimed that cryptocurrencies are impossible to value because they do not produce earnings, cash flow, or dividends,

adding, if you cannot assign a value, then how can you be bullish or bearish? She also touched on the resurgent narrative that crypto facilitates crime, a topic which was front and center in yesterday's Wall Street Journal, which published claims that Russian arms dealers used tether. With these opinions cemented, Mosavra Rahmani said she felt no pressure to change her stance on crypto as the head of Goldman's wealth division. She remains just as skeptical of Bitcoin as ever, stating that it, quote, creates absolutely no value in any shape or form. The article suggested that Goldman's wealth clients also aren't interested in Bitcoin, but it kind of seemed more like they had been discouraged from asking. The article stated,

quote, clients are well aware of her team's crypto-criticisms and haven't asked about jumping in. To credit the WSJ, they did include some quotes from Bitwise CIO Matt Hogan to balance the article. Discrediting the concept that Bitcoin has no value because it produces no cash flows, Hogan said, Bitcoin had no cash flow 10 years ago and yet it's up 15,000 percent. The world is full of things that produced no cash flow but have value. He pointed to gold, art, and collectibles as the obvious examples. Most notably, Hogan referenced the true innovation of Bitcoin, adding that it provides the service of, quote, the ability to securely store wealth without relying on a centralized

institution. Now, this is a very tired set of critiques, as you can tell. Nick Carter, for example, wrote, Tulip Mania comparisons are the best because they reveal that the subject is doubly ignorant, about Bitcoin and history. Look, if your financial advisor is being victimized by a 400-year-old Calvinist sci-op, maybe you should get a new one. Nick went on to explain the context for that, saying, the idea that tulips caused ruin is a fairy tale told by Calvinist who felt that the rapid accretion of wealth had led to societal decay. Additionally, the chart of tulip prices popularized by Charles Mackay reflects unexercised option strike prices rather than spot prices. Lastly, the tulip market was demonstrably efficient, with the post-1637 sell-off being a function

of a German loss in the 30-year-s war, causing a supply shock and demand destruction. Still, when it comes to the larger implications of this, I think Pomp had a great write-up. He wrote a newsletter yesterday called The Last Gasp from Wall Street and concluded, After reading the Wall Street Journal article, I realized something. We are watching a last gasp from the traditional financial system. The old guard is screeching about their antiquated worldview that is being disproven daily for the last 15 years. The transition from an electronic kusip-based financial system to a digitally native system is not going to happen overnight. It will take decades, but the trends are clear and the well-respected, highly accomplished people like

Sharman Mosovir Rahmani are unfortunately going to be on the wrong side of history. Hello, breakers. Today's episode is sponsored by Ledger. As another, cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary

operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. Meanwhile, to the extent that investors aren't interested in crypto, that doesn't seem to be showing up in venture capital, where crypto venture investments have seen a massive rebound.

Last month, CryptoVCs deployed 1.1 billion across 180 deals. That's a 50% increase in the cash deployed compared to February, and the largest number of deals closed in a month since April 2022. The bulk of the deals were early-stage bets. 20% of fundraising rounds closed between $1 and $5 million, and a further 15% between $5 million. Projects based in the United States closed the most deals, but this only represented 10% of the total.

Britain, Canada, Hong Kong, and Singapore all saw significant representation in the deal flow. By way of comparison, we're still a long way from the height of the speculative mania of Crypto Venture in late 2021 and early 2022. During that period, we saw $4 billion being deployed each month for six months straight. That said, this does look like the beginning of a trend rather than a one-off hot month, with large funds being raised to be deployed later in the year. The biggest forward-looking news comes from Paradigm. According to Bloomberg sourcing, they are raising a new fund between $750 and $800 million. Even if this fund comes in at the lower end of that range, it will be the largest new venture fund to be raised since crypto-winter.

Now, you might note that we're still a long way away from the lofty heights of the previous cycle. that era, Paradigm closed their largest fund at $2.5 billion in November 2021, and A16Z marked the end of that hype cycle with a $4.5 billion raise in May 2022. It's a little bit out of scope for this show, but it is definitely not just crypto funds that are seeing smaller sizes come home to roost. Back in crypto, though, recent venture news isn't just focused on established larger firms. Last week, community favorite Jordan Fish, aka Kobe, launched a new angel investing platform called Echo. The structure is similar to Angel List, with accredited investors able to group together on the platform to make small placements in early-stage crypto projects.

Kobe outlined his aim in launching the platform stating, Echo is brand new and probably not going to work. But any effort to level the playing field and increase access to early-stage crypto investing seems like it's worth a shot. So maybe we will fail, but hopefully it will be an admirable failure. The Angel Group has already closed a few deals, most notably a $300,000 investment into synthetic dollar protocol, Athena. Gabriel Shapiro, a lawyer who advised on Echo Structure, noted,

I've been critical for years how the token investment market restructured after the ICO backlash. I think Kobe is making one of the best possible and legally compliant approaches to fixing the imbalances and restoring some opportunity for us plebeians. It's very thoughtful, very needed, represents a lot of work in a compressed time frame, and I'm pretty sure he is now better at securities law than most lawyers I know. Moving over to the regulatory world for a minute, SEC Commissioner Hester Perce has spoken out against the agency's restriction of crypto custody. During a recent event, Perce called out controversial staff accounting Bulletin 121 as a, quote, pernicious

weed. SAB 121 requires custodians to place clients' crypto assets on their own balance sheets, unlike any other custodial arrangement. This means that assets are not bankruptcy remote, but more importantly, it increases the capital requirements for commercial banks to the point that crypto custody is unworkable. Pers's amped up her criticism of SEC decision-making in recent months, and frankly, this speech held nothing back. She said,

nobody can challenge the dictates because they're not final agency action, but compliance is mandatory for anyone who is trying to avoid SEC delays, denials, and enforcement, and examination scrutiny. So everybody silently complies. One of the main problems with SAB-121 is that it was put into force without a vote from the commissioners or any meaningful consultation with other regulators. Perst noted this directly, saying, the bottom line is that rules of such broad effects should be set by the full commission, not by the staff that reports only to the chairman.

Speaking more generally of the SEC's Crypto Division, Perce spoke of the, quote, dwindling of genuine commission engagement with the public. She said the request for feedback are met with crickets, largely because SEC staff do not have bandwidth to engage. She added, The root of the problem is that the commission discourages the staff from offering much more than shrugs,

silence, slow walking, and sighs. The culture at the top of the SEC has changed and that has led to a change across the whole agency in a way we interact with the public. During a recent interview, Austin Campbell of Zero Knowledge Consulting suggested that tempers are wearing thin with Gary Gensler's SEC across the board.

Campbell said, I think he's started to take enough L's on the Tradfai side that is becoming a problem for him now. The whole fiasco with the Bitcoin ETFs has not won Gary any fans in the entire asset management community. Tradfifi firms are now, oh, so you cost us tons of profit

managing Bitcoin ETFs for four years? Lastly, today, a quick note on price just for completeness because we haven't covered it for a while. After closing its highest ever monthly candle in March, Bitcoin is off to a shaky start in April. So far this month, Bitcoin has seen a 7% drawdown, briefly falling below 65,000. The sharpest price drop occurred on

Monday and was accompanied by $130 million in Bitcoin liquidations, most of them on the long side. To give a sense of scale, that's around the fifth largest day of liquidations over the past month. Not nothing, but by no means a massive washout. With heavy volatility but little in price movement over the last few days, leverage has cooled off significantly. Open interest has declined and funding rates are weighed down. Cryptotrater gel tweeted, prices are pushing lower and funding rates plummet as a result. Bitcoin and ETH margin contracts are already into the negatives. All leverage must be destroyed before price discovery. QCP Capital pointed out how severe the adjustments had been, writing, the speed of the move was due to large liquidations on retail-heavy

exchanges like Binance, which saw perp funding rates go from as high as 77% to flat. The move brings spot prices right back into the middle of the 60 to 72K range. While perp funding has compressed, the rest of the forward curve remains very elevated. Will this be the move that brings the whole curve back down? Andre Stoichov, the head of prime brokerage at Nexo, said that a cooling off period is to be expected after Bitcoin's hot streak. For fresh adopters, he said, Bitcoin's moved from 40,000 then to the current 65,000, potentially signifies an over 50% return in as little as 60 days, a sure profit-taking signal in the investment world. It's important to remember that market corrections are part of every market dynamic. Now, part of the reason for

Monday's correction could also be outside of crypto markets. With the release of more hot macro data on Monday, bond yields have ripped. The 10-year is now trading above 4.3% its highest since November, and the two-year is above 4.7% up 50 bips from the beginning of the year. Both the S&P 500 and the NASDAQ experienced significant sell-offs on Tuesday morning, reflecting a reduced risk appetite. For a Federal Reserve looking for the signal to begin cutting rates, bond yields are headed in the wrong direction. Markets are still expecting the first rate cut in June, but are now slightly less convinced. So, friends, that is the outlook in this midweek report. Lots more interesting things to come in the days ahead. But for now, one more big thank you to the sponsor

for today's show. Check out the Ledger Bitcoin Orange Nano. 5% of sales will go to support Bitcoin Development. Until next time, be safe and take care of each other. Peace.