Prices recover as U.S. Marshals' Silk Road auction begins

For the last two weeks, the bitcoin community has been abuzz about the auction of nearly 30,000 BTC by the U.S. Marshal Service. The bitcoin, seized last October from the now-defunct Silk Road marketplace, is being offered in 10 blocks. The “Dutch”-style auction is built around sealed-envelope system, removing most of the human drama from the equation. Interested bidders were asked to place a $200,000 deposit down, and then wait until today to submit a single bid. As a result, predictions about the per-BTC price have been all over the map.

With around 3,600 new BTC hitting the market every day thanks to mining, many analysts have suspected that the auction will put a downward pressure on the price. In fact, bitcoin prices dipped considerably after the announcement of the auction, as many feared the potential impact of so many bitcoins hitting the market at once. Analysts at Citi even claimed that bitcoin would hit bottom in the days leading up to the auction.

Bitcoin isn’t that liquid so the sale will be hard to swallow. It is unlikely that anyone will bid above the market price – it would make more sense to just to buy in the market in bits and pieces and it’s not as if there is indication that there is bitcoin demand that is unmet because it is hard to buy lumpy amounts. There is simply little demand for lumpy amounts.”

That analysis appears to be somewhat flawed, as prices in general have been recovering over the last two days.

There is also considerable speculation that the per-BTC price of the winning bid might actually be considerably higher than the current rate, as even a 3,000 BTC buy order would tend to move the overall prices higher. A 30,000 BTC (roughly $17.5 million) buy order from an institutional-level investor would cause the price to skyrocket long before such an order could be filled. A buyer with sufficiently deep pockets, and a reluctance to move the market publicly, might be willing to pay a hefty premium.

Although a list of interested parties was accidentally leaked last week, it’s still unknown how many bidders there are for the seized coins, and what industries and funds may have thrown their hats into the arena in recent days.

Further compounding the situation is the closed nature of the auction itself. Winners will be notified on Monday, meaning a sleepless weekend for several investment teams. Even after the auction itself is settled, there is no indication that the U.S. Marshals Service will reveal the identity of the winning bidders or the amounts those bidders paid. Barring some particularly forthcoming bidders, the exact amounts for each block may never be known.