Blockchain
How the US Government Manages Its Massive Bitcoin Reserve
The federal government’s relationship with Bitcoin has generated a lot of headlines over the years, which is surprising considering the U.S. government is one of the largest holders of Bitcoin.
Bitcoins are typically sold at public auctions conducted by the U.S. Marshals Service, a law enforcement agency within the Department of Justice. At least $1 billion in digital currency and possibly much more has been held by U.S. law enforcement. As a result, the U.S. Marshals Service, which is responsible for the sale of confiscated bitcoins, has become a major player in cryptocurrencies. (See also: US Marshals to Auction Seized Bitcoin)
But little else is known about the government’s handling of bitcoin. Now, a new Fortune article examines the mechanics of the government’s handling of its cryptocurrency treasure trove. Here are two things to learn from the Piece of Fortune.
Cryptocurrency price volatility is derailing government plans
Various agencies within the US government regularly seize valuables and precious metals and sell them at auction. But none of the seized assets have the volatility of cryptocurrency prices. This has given rise to new situations and questions.
For example, a strategically timed sale of bitcoin that significantly increased its price would have paid dividends for a government agency’s budget. But the U.S. government has been criticized for selling bitcoin at a low price. (See also: Which Governments Are Accumulating Bitcoin?)
The average selling price of bitcoin at auctions held by the Marshals Service between June 2014 and November 2015 was $379 per token. Venture capitalist Tim Draper (pictured below) hit the jackpot at the auctions, buying 30,000 coins at an estimated price of $18.5 million. At current prices, his stake is worth $300 million. That’s not a bad return for an investment of about 2.5 years. (See also: More and more billionaires are buying cryptocurrencies)
The U.S. government attempted to mimic Draper’s strategy last year. As the price of bitcoin approached $20,000 in December 2017, government agencies attempted to sell 513 coins. By the time they got the necessary permits in mid-January, the price of a single bitcoin was down and down nearly 50%.
One of the most interesting cases involving bitcoin occurred recently, when local authorities in Manhattan uncovered a kidnapping and burglary case involving ether, the cryptocurrency ethereum, in January 2018. The robber had wisely converted ethereum into bitcoin, the price of which has since risen. Authorities are left in a quandary over who should get the profits from the sale of the loot.
How Many Bitcoins Does the US Government Hold?
THE Confisca.gov site, which tracks the Justice Department’s administrative, civil, and criminal forfeiture actions, should typically be the place to find out more about the total number of bitcoins held by the government. However, according to the Fortune report, there is a delay between the date a report is published online and the date of seizure. The reports are also not archived online and no paper copies are made. The Bitcoin addresses that link the wallets to their owners are also not available.
Many agencies have seized bitcoin over the years, making the situation even more confusing. The lack of traceability for the government’s bitcoin stash has serious implications for the entire bitcoin ecosystem because it means it is difficult to ascertain and establish ownership of the cryptocurrency, which is based on principles of transparency.
For example, Fortune found that 322 bitcoins were seized from a Texas marijuana dealer in 2014, but there is no record of them being sold. In effect, this means that 322 bitcoins within the cryptocurrency network could belong to addresses that have not transacted in a long time. Eventually, they could even go out of circulation.
Earlier this year, Princeton professor Arvind Narayanan conducted research on coins that are burned and can’t be spent forever. “We’ve all heard stories of cryptocurrency owners losing their private keys, and it’s impossible to estimate how many coins have been lost this way,” he said.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the author to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, you should always consult with a qualified professional before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. The author holds small amounts of bitcoin as of the date this article was written.