On June 7, a US government group seized more than $2 million in Bitcoin (BTC) as ransom following an attack on the Colonial pipeline system. The lawsuit filed with the United States District Court for the Northern District of California shows that the authorities returned 63.7 BTC.
When news of the recovery spread across the mainstream media, some media outlets suggested that the US government had somehow hacked the Bitcoin address to recover the funds. For example, University of Michigan professor and staff member Justin Wolfers tweeted:
This sparked a debate about whether a device can crack SHA-256 encryption, and if so, why waste this opportunity opening a Bitcoin wallet containing only $2 million?
The same type of encryption is used by the NSA, banks, foreign agencies, cloud storage systems, and most electronic devices such as smartphones and communications apps.
If governments are to wreak short-term havoc on the cryptocurrency market, they will need significant sales to negatively impact prices. However, there are probably at least three signs that could indicate that this type of scenario is unfolding.
Open interest in CME BTC futures will increase
The most likely short circuit (sell) for government entities is to trade CME Bitcoin futures. In addition to price pressures, analysts will have to confirm a significant increase in open interest rates, that is, the number of contracts being run. Unfortunately, CME does not provide real-time data for this indicator.
Settlement data for CME Bitcoin futures. Source: CME
As explained above, each CME Bitcoin futures contract represents 5 BTC, so the open interest rate of 7,572 is 37,860 BTC. These agreements contain money accounts, which means that the winner gets paid in dollars.
While the current open interest rate of $1.25 billion doesn’t seem big enough to trigger a shock wave, that number peaked at $3.3 billion in February when bitcoin was trading at $58,000. Thus, a large and rapid increase in open interest is a possible indicator of the performance of the government.
The future insurance premium must be negative.
A large seller of futures contracts will cause a short-term distortion in the futures premium. Unlike perpetual contracts, these fixed futures contracts do not have a funding rate, so the price will be very different from regular spot exchanges.
By measuring the price gap between the futures contract and the normal spot market, a trader can gauge the level of an upward trend in the market. With short selling activity (sellers), futures contracts will be traded for two months at a discount of 1% or more.
CME: July Premium / Discount on Bitcoin Futures vs. Coinbase, May 2021 Source: TradingView
Note how futures contracts are traded on the Chicago Mercantile Exchange in July at a 0.5% discount and a 1.5% premium on traditional spot exchanges. However, during the crash on May 19, the heavy selling of futures led to a 2.5% drop in price from Coinbase.
This movement can occur either during liquidation orders or when large players decide to close the market with derivatives.
Exchange infrastructure will be attacked
While most cryptocurrency exchanges have set up their servers in remote locations, authorities may attempt to use physical servers or web domains.
Investors who have been following the crypto sector since 2017 remember that Alex Finnick, founder of BTC-e, was arrested and kidnapped by the US government in July 2017.
In November 2020, Cointelegraph published an excellent article explaining how, according to the structure of the US Department of Justice, a crypto transaction could be sufficient to “affect the economy, data warehouse or other computer systems in the United States” to trigger enforcement action.
Any coordinated government effort to curb cryptocurrencies is likely to lead to massive anti-money laundering efforts against exchanges, especially those that offer derivatives to retail investors.
Thus, there is no reason to believe that a massive government-led campaign to undermine the industry is going on unless these three signs are present.