US begins 'unprecedented' auction of Silk Road bitcoins

June 27, 2014
This May 1, 2014 photo taken in Washington, DC shows bitcoin medals

The bitcoin world kicked into high gear Friday as the US government began auctioning some of the virtual currency seized in an FBI investigation of dark Web bazaar Silk Road.

The US Marshals Service auction was taking place until 2200 GMT for 29,000 bitcoins—about $17 million at current rates, although bitcoin values have been highly volatile.

Bidders had to register last week with a deposit of $200,000—in cash only from a bank transfer. Winners are to be notified Monday.

US authorities have another wallet of over 144,000 bitcoins which is not currently up for sale, which makes Washington likely the largest holder of the controversial cryptocurrency.

Bitcoins, according to backers, allow for an efficient and anonymous way to store and transfer funds online, but some governments contend the lack of regulation creates huge risks, and that virtual currencies are often linked to and organized crime.

The digital wallets were seized by the FBI in its investigation of Silk Road, an for drugs, hacker tools and other illegal goods and services.

Bitcoins were created by a computer programmer in a way that allowed only limited amounts to be created. Whether they represent a currency is debated, but they are not backed by any central bank or government.

Bitcoin Shop, a marketplace, announced that it would be bidding for the government-held coins.

"We believe in the future of virtual currencies and have made a strategic decision to participate in this unprecedented opportunity by wiring the deposit and submitting a registration application to the USMS," said chief executive Charles Allen.

Mark Williams, a Boston University finance lecturer and critic of virtual currencies, said the US is simply trying to unload its holdings.

"This auction doesn't validate bitcoin but simply demonstrated that the US government is anxious to get out before prices drop again," he said.

"The US Marshals Service (USMS) has over 29,000 reasons to sell by private auction and sell now."

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1 / 5 (2) Jun 27, 2014
Bitcoins, according to backers, allow for an efficient and anonymous way to store and transfer funds online, but some governments contend the lack of regulation creates huge risks, and that virtual currencies are often linked to money laundering and organized crime.

They are a huge risk to honest backers, because it is the backing of the honest people which allows the virtual transfer of illegal funds to be completed. Criminal1 buys bitcoins, and transfers them to Criminal2. Criminal2 sells his bitcoins to an honest person, unsuspecting. An actual currency transfer did not happen, yet Criminal1 did in fact transfer money to Criminal2.

Additionally, if they manipulate the market a bit, or wait around to the right time, they can actually gain money in the process at the expense of honest people, by buying low and selling high. Organized criminals often have more money available than honest individuals, so they have more access to manipulate this simple economic concept.
1 / 5 (2) Jun 27, 2014
It actually has all of the problems of the paper dollar, and further problems due to little or no regulation.

It's value is defined by human rationality, or irrationality, and the value of paper money, or the perceive barter value of traded goods, but all of these things are relative when it comes to human perception. Which means some people are actually at a huge disadvantage when using this system, while other people with more capital and resources (to investigate and manipulate) are at a huge advantage. Unlike stocks or even grocery coupons, the bitcoins' value is not tied to anything that is directly quantifiable, except the rationality or irrationality of the human perception.

It's literally a lottery game.

At least Dollars are defined (a bit) by a combination of things: accepted wages, interest rates, government access, and accepted norms for important resources, such as fuel and food, but even dollars are manipulated and abused via scalping, etc.

no regulation vs some...
1 / 5 (2) Jun 27, 2014
Oh yeah, because Pennies, Nickels, Dimes, and Quarters are made of metals, albeit mostly common, a Dollar has an absolute minimum value ascribed to it, since it is co-defined with the metal coins, and worst case scenario the metal is melted to make something with it, and we burn the dollars (if their currency value collapses) to make heat for some good reason.

Bitcoins have no material backing whatsoever.

A dollar has at least some material backing, because it's value is by definition tied to that of metal coins, which we can calculate a minimum value based on the weight of the equivalent coins: 100 pennies, or 20 Nickels, or 10 Dimes, or 4 Quarters.

Even if the concept of "dollars" or "cents" became worthless for some reason, the metal would still have value, and even the paper would still have some absurdly low value, but non-zero.

A bitcoin does not have intrinsic value of any kind. It's actually a liability to maintain, depending on the storage media.
1 / 5 (2) Jun 27, 2014
It currently takes 177.7 U.S. Pennies to equal 1 pound

Zinc is currently $0.98 per pound.
Copper is $3.19

Penny is copper-plated Zinc.

So 319 pennies can be traded for $3.19 worth of "dollars", even though 177.7 pennies have a market value of just about $1 worth of Zinc when converted to market "Dollars" if computed.

so then you need 3.19 * 177.7 = 567 pennies for it's mostly Zinc value to equal the market value of Copper.

Which meas trading pennies for Copper (on the market) is a net gain of (567/319) - 1 = 77% profit when converted back to "dollars"....which can then be traded for more pennies...

You could literally become a millionaire by doing this, at least in theory.

This is how stupid paper currency is, much less a virtual currency, because the metal the paper currency is co-valued with is actually sold for twice the paper dollar face value of the coins made of the same stuff.
1 / 5 (2) Jun 27, 2014
What this implies is that a "Dollar" actually trades for 77% more than the real value of the 100 Pennies it is is defined to be.


319 pennies is 1.8 pounds. Zinc is $0.98 per pound, which is $1.76 at present market price.

Which means the "currency" value on the face of pennies is 80% more than the alleged "currency" price of the Zinc the penny is made from.

So 319 pennies, ~1.8lbs of Zinc, can buy 3.25lbs of Zinc.

Which is stupid, because the pennies are made of almost all Zinc, and the amount of Copper in the penny doesn't make up for that price discrepancy.

That's right, you can trade 1.8lbs of Zinc for 3.25lbs of Zinc, and it doesn't make sense.

This appears to be why trade and economic systems fail, because the metal's market value is drastically different from the face value it is ascribed in currency form. This by itself is capable of creating "bubbles" or contributing to them.

Notice how arbitrary this is for the Dollar, and notice how much worse it is for Bitcoins
not rated yet Jun 27, 2014
A dollar has at least some material backing

That's irrelevant, because the real value of a dollar is defined by the debt used to create it in the first place.

Some of the debt is always due to be paid at any given moment, and the party that holds the debt at the moment needs to turn real value back into dollars to pay it, and it's this value that defines the value of the dollar. It's however much people need to sell in order to get the number of dollars they owe.

If people holding the debt simply default, then the value defaults to the value of whatever collateral they had offered.
1 / 5 (1) Jun 29, 2014
The US government is validating the value of bitcoins by selling them. Thus in essence the government is saying bitcoins are a currency, and as valid as the US dollar, if not more so since they can't print bitcoins like they print dollars (i.e., without a limit to the number they print).

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