On June 7, United States Government Task Force Seizes Over $2 Million in Bitcoin (B T cTo pay the ransom after the attack on the colonial pipeline system. A warrant filed in the US District Court for the Northern District of California shows that authorities recovered 63.7 BTC.
As news of the recovery spread through the mainstream media, some outlets suggested that the US government had somehow hacked bitcoin addresses to extort funds. For example, University of Michigan professor and New York Times contributor Justin Wolfers tweeted:
News of how the government has snatched bitcoin from cybercriminals’ online wallets certainly undermines bitcoin’s use cases even further.
— Justin Wolfers (@JustinWolfers) 8 June 2021
This triggered a discussion about whether an entity can break through SHA-256 encryption, and if so, why waste this ability to unlock a bitcoin wallet that only holds $2 million?
The same type of cryptography is used by the National Security Agency, banks, foreign agencies, cloud storage systems and most electronic devices such as smartphones and communication apps.
If governments want to cause short-term mayhem in the cryptocurrency market, they will need to sell large enough to have a negative effect on the price. However, there will probably be at least 3 hints indicating that this type of scenario was unfolding.
Open interest in CME BTC futures will increase
The CME is most likely to short (sell) government entities by trading bitcoin futures. In addition to price pressure, analysts will need to confirm a large increase in open interest, which is the number of contracts in play. Unfortunately, CME does not provide real-time data for this indicator.
As shown above, each CME bitcoin futures contract represents 5 BTC, so 7,572 open interest is a total of 37,860 BTC. These contracts are financially settled, meaning that the winner is paid in dollars.
While the current $1.25 billion open interest doesn’t seem significant enough to create a shockwave, the figure jumped to $3.3 billion in February as bitcoin was trading at $58,000. Therefore, a substantial and rapid increase in open interest is a likely indicator of government-related activity.
Futures premium should flip negative
A large futures contract seller will cause a momentary distortion in the futures premium. Unlike perpetual contracts, these fixed-calendar futures do not have a funding rate, so they will be priced quite differently from regular spot exchanges.
By measuring the price difference between the futures and regular spot markets, a trader can estimate the level of bullishness in the market. Whenever there is any aggressive activity from the shorts (sellers), the two month futures contract will trade at a discount of 1% or more.
Note how the July CME futures typically trade between a 0.5% discount and a 1.5% premium versus regular spot exchanges. However, during the May 19 crash, selling aggressive futures contracts caused the price to drop by 2.5% from Coinbase.
This movement can occur either during liquidation orders or when the big players decide to short the market using derivatives.
Exchange infrastructure will be attacked
Even if most cryptocurrency exchanges set up their servers in remote locations, governments may attempt to seize physical servers or web domains.
Investors who have followed the crypto sector since 2017 will remember that Alex Vinnik, founder of BTC-e arrested and website hijacked by the US government in July 2017
In November 2020, Cointelegraph published an excellent article explaining how, according to a framework of the US Department of Justice, this could be sufficient for crypto transactions. “touch financial, data storage, or other computer systems within the United States” To incite enforcement action.
Any coordinated effort by governments to suppress cryptocurrencies could include massive “anti-money laundering” efforts against exchanges, particularly those offering derivatives products to retail investors.
Thus, unless these 3 signs occur, there is no reason to believe that there is a massive government-led campaign to disrupt the industry.
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