The Breakdown - The US Gov't Sells Its BTC Stack

Episode Date: June 28, 2024

The US is selling. Germany is selling. Mt. Gox unlocks are coming. Is it something we should be worried about? NLW explores. 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 Thursday, June 27th, and today we are talking about the U.S. government dropping some coin on us. 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 of the show notes or go to bit.ly slash breakdown pod. Well, friends, the U.S. government is dumping another tranche of Bitcoin. Government wallets were spotted transferring 3,940 Bitcoin to Coinbase Prime yesterday afternoon, worth around 241 million. These transfers are presumed to be settlement of a prearranged sale or simply selling the Bitcoin

into the open market. Arkham Research traced the Bitcoin's transaction history and concluded it had been forfeited by BoundMeet Singh earlier this year. Singh was a narcotics vendor on dark web markets between 2012 and 2017. The Indian National controlled multiple distinctions. distribution cells within the U.S. and was arrested in London in 2019. He was extradited back to the United States in 2023 and ultimately pled guilty to conspiracy to distribute controlled substances and conspiracy to launder money in January of this year. The Bitcoin was forfeited as part of his sentencing in April making it eligible for sale. In total, the U.S. government has sold off more than $195,000 Bitcoin since 2014. If they'd held onto it, the Bitcoin would have been worth $11.8 billion

today. Then again, maybe that seems like small change for a government whose annual deficit is now in the trillions, and the U.S. government still has a gigantic stash of 213,000 Bitcoin obtained from seizures, worth about $13 billion at current prices. For a sense of scale, micro-strategy only recently became a larger Bitcoin holder than the government thanks to purchases made in April. Once again, similar to every time the government has used Coinbase to liquidate their holdings, commenters rushed to point out the hypocrisy. Fortune magazine crypto editor Jeff John Roberts tweeted, this would be the same Coinbase the SEC says is an illegal brokerage. Cryptoquant CEO Kiyung-Ju did the analysis on this round of sales, stating that he is, quote,

tired of government selling FUD. He showed that Coinbase Prime handles 20 to 49,000 Bitcoin worth of sell-side liquidity daily during periods of high ETF inflows. When inflows are weak, Coinbase Prime is still able to handle between 6 and 15,000 in Bitcoin sales without a problem. But more simply, this tranche of government sales should not be large enough to strain liquidity on Coinbase. Then again, the fud that springs up around government selling is never about the size of the immediate sales. It's about the fear that the entire stack could be liquidated at any moment. Veteran trader Bitcoin Jack voiced those concerns, asking, what are the odds Biden will try to sell all government-owned coins just to try and make Trump

look bad? Now, the idea of the U.S. government liquidating $13 billion with a Bitcoin over the short term seems unlikely to put it mildly. The government can only sell seized Bitcoin after they have obtained a court order, which comes during the sentencing process. As we saw in this case, the government is often quick to hit the sell button as soon as possible. But that doesn't mean the entire stack is at risk of being liquidated. Most of these Bitcoin are tangled up in legal processes that could take years to resolve. One of the largest seizures was around 95,000 Bitcoin from the Bitfinex hack. That haul is currently valued at over $6 billion and is close to half of the government's

Bitcoin holdings. The hackers pleaded guilty in August of last year, but they are yet to be sentenced. Eli Liechtenstein is currently providing assistance to the DOJ on an ongoing basis in order to mitigate his sentence, so we have no idea how long the delay will be. And that's, of course, to say nothing of the potential that BitFinex itself could make a claim on the Bitcoin. Another big seizure was 50,000 Bitcoin from Silk Road hacker James Zhang. All of that, Bitcoin does seem eligible to be sold, with the government liquidating around 10,000 Bitcoin in March. That leaves roughly $2.4 billion worth still to be sold, but it's not entirely

clear what the holdup is. None of this is to say that the FUD doesn't have a kernel of truth. The U.S. government has a giant stack of Bitcoin, and they seem to be selling it as fast as possible. They just don't seem to be legally able to sell the entire stack over a short time frame. Market reactions are another matter entirely. Whenever government Bitcoin starts moving around, it reminds people of just how much selling pressure there could be, and that in and of itself is enough to cause the fud. Interestingly, it wasn't just the U.S. this week, but another high-profile government selling in the form of Germany. Last Wednesday, the German government began moving seized Bitcoin onto exchanges, and they've continued all week. So far, they've transferred more than

3,500 BTC worth around $213 million, presumably to be sold or settle OTC deals. The German Bitcoin stack is still massive worth around $2.7 billion, and unlike the U.S. government Bitcoin, these holdings are entirely from a single seizure executed against a movie piracy website earlier this year. That legal matter is concluded, so it seems the entire stack is eligible to be sold. The German government has so far been using Coinbase, Cracken, and BitStamp as their brokerages, which could be a sign that they are trying to tap into multiple pockets of liquidity. On Wednesday, they made their first transfer to a trading firm called Flow traders, sending them 345 Bitcoin worth 20 million. This could be settlement of an OTC deal,

or it might indicate the government has called in the professionals to help them liquidate their holdings. You'll notice that I'm using, it might be this, it might be that, as a construction, with a lot of this. The reason for that is that we simply don't know, and everything is about speculation. However, crypto is one of the most hyper-analyzed, paid attention to, and generally focused upon industries in the entire world. And so by consequence of that, we spend a lot of time interpreting what could be or what might be. Hello, friends. Before we get back to the rest of the show, I want you to join me at Permissionless. Permissionless is a conference for Cryptonatives by Cryptonatives. And the reason it's so important

this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the U.S. remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, which will lead to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is a conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And what's more, I'm going to be there.

The location is Salt Lake City. The dates are October 9th to the 11th, and right now, tickets are just $199. Towards the end of the month, they are going up to $499, and if you want 10% off, use code breakdown 10 when you check out. If you go to the Blockworks website, blockworks.co, there will be lots of information about how to register, and again, use code Breakdown 10 to get 10% off. The other big supply overhang in the market is the Mount Gox distribution.

After more than a decade of waiting, the trustee will begin returning $8.6 billion worth of Bitcoin to creditors, starting sometime in July. This is one of the largest ever liquidity events in Bitcoin's history. It's the equivalent of around a year's worth of mining rewards coming back onto the market. While the Mount Gawks unlock is a legendary piece of fud, some analysts think it won't be quite as bad as some imagine. Alex Thorne of Galaxy Research has been doing excellent work on this topic for several years. He notes that the July distribution is technically an early payout, and creditors had to accept a 10% haircut to receive it. Thorne estimates that around 3 quarters of creditors took that

option. By his calculations, around 20,000 Bitcoin are owed to investment funds who bought claims, a further 10,000 BTC are going to be repaid into the Bitcoinica bankruptcy estate, which leaves around 65,000 to be distributed to individual creditors, already a massive reduction from the 141,000 Bitcoin in the Mount Cox estate. There has also been an active market for buying Mount Cox claims for many years, so most individual creditors who have held out on their claims likely just want the Bitcoin payout. Based on his discussion with claim funds, Thorne thinks that most are investment vehicles for high net worth Bitcoiners looking to accumulate cheap BTC. He knows that there's very few specialist bankruptcy claims funds that got in on this trade

as an arbitrage. For the Bitcoin-focused funds, many have been set up to distribute Bitcoin directly to their investors, so shouldn't add to sell pressure as they are wound up. Overall, Thorne thinks the number of Bitcoin to be distributed this year is smaller than the headline suggest, and that creditors are far more likely to hold than some people expect. Alex is much more researched and intelligent about this stuff, but this is 100% my position as well. I think that the folks who have been forced holders because of Mount Cox are much more likely to stick around than the FUD seems to give them credit for. Now, anticipated selling pressure from these three sources have combined to drive Bitcoin's price to range lows earlier this week.

Bitcoin briefly dropped below $60,000 on Monday but has since recovered slightly. News of the U.S. government selling only had a very small impact on price, possibly suggesting that sentiment is already as low as it can get. The total drawdown from highs in early June is only at 15%, nowhere near as large as the monster pullbacks from previous bull markets. This also seemed to be a Bitcoin-specific headwind, having pushed Bitcoin dominance down to multi-month lows. Some have seen enough and think we're headed much lower.

Andrew Kang of Mechanism Capital wrote earlier this week, With Mount Gawks, German coins, ETF selling on the horizon, I do not believe that support levels and ranges will hold. Invidia looking like a local top. The only buyer seemed to be leveraged in short-term traders knife-catching. These moves typically result in a multi-billion-dollar cascade, and that will be the signal. Others are trying to find a bottom here. Investor Quentin Francois-François tweeted,

Germany dumping Bitcoin, Mount Gawks dumping Bitcoin, now the U.S. dumping Bitcoin. The bottom is very close. It always has been when governments are selling Bitcoin. Zach Vol pointed out how notable the lack of another leg down was on Wednesday, suggesting narrative exhaustion. He wrote, Bitcoin's prices dropped for three weeks straight. There was no news. Now we have news of the U.S. government selling, the German government selling, and Mount Cox creditors can start selling too. Bitcoin's price is down 1%. You won't see me being bearish. One may be slightly good piece of news. ETF outflows seemed to have died down with the funds putting together two straight days of net inflows.

Prior to Tuesday's session, the Bitcoin ETFs had been on a seven-day losing streak. Over that period the fund saw a cumulative $1.1 billion in net outflows. We now have back-to-back positive days with a relatively small $52 million in net inflow since Tuesday. To the extent that there are outperformers, Fidelity saw a big rebound on Tuesday after taking the brunt of the outflows. BlackRock's fund saw volume spike up to a billion dollars on Tuesday with zero net inflows, suggesting an active two-sided market for the most liquid product. So again, none of the inflow numbers have been especially large. It's just notable that the bleeding has stopped for now. Following up on a story from earlier this week, an anonymous bitcoiner has paid

for Julian Assange's flight home. The WikiLeaks founder touched down in Australia yesterday after stopping off in the Northern Mariana Islands to finalize his plea deal. In an interview on Wednesday, his wife Stella Assange mentioned that freedom comes at a cost. She disclosed that the Australian government had required Julian to pay $520,000 to charter a flight home

as he was not permitted to fly commercial. Stella opened a crowdfunding campaign to raise the money, which received around $380,000 in fiat donations. However, a single anonymous bitcoiner picked up most of the tab, donating 8 BTC to the cause, around 480,000 at current prices. Thanks to this generous Bitcoins, Assange will now be able to start his life over debt-free, and while it may be a bit crass to speculate on the Bitcoiners' identity,

given that they haven't revealed themselves, at Blockheight 849,484 when the payment was made, Jack Dorsey did tweet Safe Passage Through. One interesting shift from a place that had been heading in the opposite direction seemingly, new regulations in the UAE could signal a shift away from permissive crypto policy in the kingdoms. The UAE's central bank recently introduced rules that would prohibit accepting crypto as payments for goods and services other than licensed stable coins in the local currency. The catch is that there aren't any stable coins backed by the UAE currency.

Said local lawyer, Arena Heaver, this policy shift could signal a less favorable environment for the crypto industry, which is not beneficial for the UAE's image or its ambitions in the digital economy. While the UAE and its capital Abu Dhabi have taken big strides to becoming a global crypto hub, the Emirates lack the developed industry associations that have sprung up in other notable regions like the Crypto Valley in Switzerland. It's unclear at this stage whether the UAE Central Bank is intended to crack down on crypto payments or are merely insisting on unworkable regulation without fully considering the ramifications. You can probably tell from this

slate that it is a little quiet out there. Mostly we have the summer doldrums, a little bit of fud here and there with government selling, and not a ton of new catalyst to get people really excited. But I would always caution not to take the fact that there isn't all that much going on, comparatively speaking, as a sign that things are bad. It's just a sign that there's not all that much going on. Tonight in the U.S. we have the presidential debate, where many are wondering if we will see our first presidential debate question about crypto, and of course we will be back tomorrow to talk about exactly that. In the meantime, though, that's going to do it for today's episode of The Breakdown. Until next time, be safe and take care of each other. Peace.