What will happen if the government tries to take over Bitcoin


June 7th, United States Government task force seized more than $2 million in Bitcoin (Bitcoin) Pay the ransom after the colony pipeline system is attacked. The arrest warrant submitted to the U.S. District Court for the Northern District of California showed that the authorities recovered 63.7 BTC.

As news of the recovery spread through the mainstream media, some media hinted that the US government had somehow hacked Bitcoin addresses to withdraw funds. For example, University of Michigan professor and New York Times writer Justin Wolfers wrote on Twitter:

This has sparked discussions about whether entities can break through SHA-256 encryption. If so, why waste this ability on unlocking a Bitcoin wallet with only $2 million?

The National Security Agency, banks, foreign institutions, cloud storage systems, and most electronic devices (such as smartphones and communication applications) all use the same type of cryptography.

If governments want to cause short-term disruption in the cryptocurrency market, they will need to sell in large quantities to have a negative impact on prices. However, there may be at least 3 clear signs that this is happening.

CME BTC futures holdings will soar

The most likely tool for government entities to short (sell) is to trade CME Bitcoin futures. In addition to price pressure, analysts also need to confirm a substantial increase in open positions, that is, the number of contracts in play. Unfortunately, CME does not provide real-time data on this indicator.

CME Bitcoin futures settlement data.Source: CME Group

As shown in the figure above, each CME Bitcoin futures contract represents 5 BTC, so 7,572 open positions total 37,860 BTC. These contracts are financially settled, which means that the winner is paid in U.S. dollars.

Although the current $1.25 billion in open positions does not seem to be enough to generate a shock wave, since the transaction price of Bitcoin is $58,000, this figure did reach $3.3 billion in February. Therefore, the substantial and rapid growth of open positions is a potential indicator of government-related activities.

The futures premium should be turned into a negative number

A large seller of futures contracts can cause instantaneous distortions in the futures premium. Unlike perpetual contracts, these fixed calendar futures do not have a financing interest rate, so their prices will be very different from regular spot exchanges.

By measuring the price gap between the futures and the regular spot market, traders can gauge how bullish the market is. Whenever there is aggressive activity on the short (seller), the two-month futures contract will be traded at a discount of 1% or more.

Comparison of CME July Bitcoin futures premium/discount and Coinbase in May 2021. Source: TradingView

Please note how July CME futures usually trade between a 0.5% discount and a 1.5% premium compared to regular spot exchanges. However, during the May 19 crash, aggressive futures contract selling resulted in prices 2.5% lower than Coinbase.

Such changes may occur during the clearing of orders, or when large participants decide to use derivatives to short the market.

Exchange infrastructure will be attacked

Although most cryptocurrency exchanges have established servers in remote areas, the government may try to seize physical servers or network domains.

Investors who have been following the crypto industry since 2017 will remember that Alex Vinnik, BTC-e, arrested, website hijacked Issued by the U.S. government in July 2017.

In November 2020, Cointelegraph published an excellent article explaining how cryptocurrency transactions are sufficient under the framework of the US Department of Justice “Access to financial, data storage, or other computer systems in the United States” To trigger law enforcement actions.

Any coordinated efforts made by the government to suppress cryptocurrencies may involve large-scale “anti-money laundering” efforts against exchanges, especially those that provide derivative products to retail investors.

Therefore, unless these three signs are in place, there is no reason to believe that a massive government-led campaign to disrupt the industry is underway.

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