On Friday, Germany's football squad faced a tough knockout loss at home in this year’s Euros. Our team at Hashdex, however, was tracking another botched opportunity in the country last week: their government’s selling of bitcoin it had seized from criminal activity. For football fans, this move was reminiscent less of the perfect machinery of the 1974 Beckenbauer team and more of Brazil's disastrous 7-1 loss against the Teutonic titans in 2014. 

 

This selling pressure has dragged on the market, with crypto prices dipping to a four-month low. Bitcoin (BTC) fell nearly 8% and the Nasdaq Crypto™ Index (NCI)—developed in partnership with Hashdex to reliably benchmark the institutionally investable crypto market—dropped 9% for the week. The negative crypto asset performance has not solely been driven by the German government’s bitcoin dump. Repayments to creditors from the 2014 Mt. Gox exchange hack started last week and it remains unclear how much of the US$9 billion being returned will be sold. Additionally, some bitcoin miners—particularly those struggling with profitability—are being forced to sell their BTC in the wake of the most recent halving, which reduced the issuance of new bitcoin by half. 

These two downside catalysts were expected, but the sale of Germany’s bitcoin—at least the speed and manner at which it has transpired—has been somewhat surprising. This has forced us to ask a couple of important questions:

• First, what does this mean for short-term prices? 

• Second, how does this impact the long-term investment case for crypto assets? 

 

To answer the first question, some context is helpful. Germany had approximately 50,000 bitcoin before its selling began. As of today, July 10, about a quarter of that bitcoin, valued at roughly US$800 million, remains. Typically, what we have seen in the past with governments selling confiscated crypto is a very orderly process that relies on OTC desks, not public exchanges, to minimize the market impact. For example, the US government earlier this month partnered with Coinbase to ensure an organized and secure liquidation of its digital assets after conducting a lengthy due diligence process. The German government approached the task more haphazardly, potentially leaving money on the table and creating a lot of noise along the way. 

The market has, however, handled this chaotic selling well, even with the tremendous speculatory behavior and rumors around order flow that ensued. Most importantly, at the current pace, it seems as if the German government’s sale of BTC will be complete within a matter of days, not weeks. As a result, we do not anticipate this sale will continue to have an outsized impact on near-term prices.   

 

Germany’s sale of BTC is rapidly tapering off

^{Source: Arkham Intelligence, accessed July 10, 2024}

Regarding the second question about the longer term impact, it’s important to note that during last week's nearly double-digit losses, inflows to crypto asset funds were around US$400 million. This was the first week in the last four with positive flows and we believe it's a clear sign that many investors are viewing the current price dips as an opportunity to allocate. 

 

It’s always important to step back from near-term price action during these drawdowns. The NCITM and bitcoin remain up over 30% year to date. The type of supply shock we have seen tends to have a very short-term impact as speculation drives negative performance before cooler heads ultimately prevail. While it’s common for crypto’s investment thesis to be questioned during these times, historical data reinforces that these drawdowns—sometimes exceeding 20% or more—are completely normal in bull markets. All in all, this means that the one-off events witnessed in the last month have no material impact on our long-term thesis for this asset class. To the contrary, we believe the current conditions are creating a great entry point for investors.

Further, some German policymakers are calling into question the uncharacteristically chaotic process in which the recent selling has occurred, suggesting the move may be due to budget deficits or politically motivated. Regardless of the motivation behind this selling, this is the latest example underscores why we continue to believe governments globally should avoid short-sighted actions, including holding it as a strategic reserve asset, as they stand to benefit tremendously from this technology.

The German football team, a young group with great promise, will certainly have another chance to win the Euros in 2028. But the country’s selling of the world’s best performing asset of the past 15 years may prove to be the bigger loss.

 

^{¹Nasdaq and Messari data as of July 10, 2024.}

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