Bitcoin

On the heels of an unprecedented run-up that saw the price of bitcoin spike by 50 percent over a 10 day period, the crytptocurrency is taking it on the chin a bit today.

The downward movement comes thanks to news, first reported by Forbes, that, as of this morning, the FBI has located and seized an additional 144,000 bitcoins – valued at approximately $28.5 million at the time – believed to belong to jailed Silk Road founder Ross Ulbricht.

It’s already the biggest seizure in bitcoin history and yet, there is another account containing an additional 111,000 bitcoins that have yet to be seized but are believed to belong to Ulbricht. One explanation given for this is that the FBI may not possess the private key required to gain access to the wallet.

As of 2:45pm PST today, the trading price at Mt. Gox was $190.03, up from an intraday low of $176.60, but still down nearly 10 percent from the $209.00 value at which it started the day.

Prior to today, bitcoin largely seemed to have survived the FBI action against Silk Road road unscathed. The price dropped briefly, following the October 2 news announcement, but has since rebounded and seen the aforementioned price appreciation. At the time, the FBI had seized approximately 32,000 bitcoins worth $3.5 to $4 million at the time and $6 million at today’s prices.

The question bitcoin bulls will need to ask themselves then is whether the market will see the same temporary correction this time around or whether this is a sign of more pain to come.

There are a few differences between the earlier seizure and today’s. First, the number of bitcoins in question is greater by a factor of 4.5. Ulbricht’s bitcoin holdings are likely among the largest in the world. The total number of bitcoins in circulation today is approximately 11.9 million, which at current market value represents approximately $2.26 billion.

The 176,000 bitcoinS seized from Ulbricht over the last month represent approximately 1.5 percent of this total circulation. Add in the additional 111,000 bitcoins, and that number jumps to 2.4 percent.

Silk Road allegedly generated commission revenue of approximately 600,000 bitcoin over its lifetime on 9.5 million bitcoin worth of sales, but reinvested much of that sum back into the business. There may, however, be additional undiscovered holdings belonging to Ulbricht, that if found would increase the FBI’s holdings.

Any time large holdings in a single currency or commodity change hands, it can create instability, particularly when law enforcement is involved. The FBI has said previously that it plans to plans to exchange the seized bitcoins for dollars, assuming Ulbricht is convicted at trial or settles. Doing so, if not done thoughtfully and patiently, could flood the bitcoin market and send the price of the currency plummeting.

A Reddit thread has been created which identifies the FBI bitcoin wallet, and many users are using micro-transactions to send (mostly humorous) public messages to the account.

Bitcoin has shown surprising resiliency, regaining much of the value lost following the Department of Homeland Security’s seizure of Dwolla and Bank of America accounts belonging to the world’s top exchange, Tokyo-based Mt. Gox, and subsequently propping itself up in the face of the ongoing Silk Road fallout.

There are plenty of arguments to make for why bitcoin is a viable alternative currency, including freedom from governmental manipulation and inflation protection. But it will need to survive regular interference from law enforcement, and the resulting near-term uncertainty if it is to make it that far.

It would seem that we remain closer to the beginning than to the end of this saga.

[Image via BTCkeychain, Flickr]