The Feds Are Ready To Sell $25 Million of Bitcoin Seized From The Silk Road

In this case there's abundant evidence of a criminal enterprise involving the sale of drugs, attempts to purchase the services of hitmen etc. etc. So 'Dread Pirate Roberts' only likely defense is to claim something along the lines of 3v1l H4x0rs taking over his computer for the last several years while he played minesweeper or suchlike, and disavow any awareness of of or custody over the money; otherwise he'd have to explain just how he came to be in possession of several $m of BTC that was sent to Silk Road.

This is interesting as an example of BTC's strength being a vulnerability. Suppose you were arrested in a warehouse with a pile of cash and numerous bricks of cocaine, AK-47s, etc. Of course the government would claim you're a drug dealer, but you could attempt to convince the court that you had won the money in Vagas/sold a great deal of pizza/whatever and been kidnapped by evil drug dealers on your way to the bank, only to wake up alone and confused next to your cash in the warehouse just before the cops arrived. An unlikely story to be sure, but there are many legal means through which you might come to possess a large stack of currency (and which might also provide you with a much-needed alibi, eg video of you winning big and leaving the casino only to be waylaid on the strip by masked bandits). Where BTC is concerned, though, the blockchain itself is proof that the money was sent to the receiving address given out by Silk Road in exchange for contraband, so the government has a prima facie case that it consists of revenue from a criminal enterprise.

Selling at the immediate price they can get in a very volatile vehicle is not 'handing them out at random'.

Consider if all governments outlaw it simultaneously. The market participants currently consist of free market type enthusiasts & hobbyists, rich celebrity speculators, drug dealers and cyber criminals. I think it is a fair assumption that most of the active traders are currently from the hobbyist & enthusiast category. Additionally when you consider that places like Silicon Valley and other hubs around the world have a large proportion tech savvy workers who make a lot more than subsistence wages, it's not too hard to see how some sort of speculative market could continue to lumber along without much reason for existence. Look at sports betting and horse racing.

If the government were to come out and drop the hammer, however, I think most of these people (myself included) would vanish. The volume would dry up and the only people left in the market would be criminals and people with a hard requirement for virtually untraceable digital currency, prison be damned. My opinion is that these people would continue to remain using it as a means of commerce and store of value provided that the underlying cryptography & p2p network remain sound and un-compromised. There are currently millions of bitcoin in existence so a price of near zero would probably satisfy the black market. How does $3 sound as a reasonable number that readers can use against me in the probable event that I turn out to be wrong 5 years from now?

Of course this all relies on the underlying cryptography and associated peer to peer network remaining sound and trustworthy. If a party is able to compromise the underlying encryption or execute a double spend by attacking the network then trust in bitcoin as a finite commodity would be irrevocably destroyed. No one would ever use it, thus a $0 price.

The utility of bitcoin is just too hard to ignore from a commerce perspective. It's taking away authority and power from banks to act as gate keepers to their countries finical & economic system and putting it in the hands of the people who engage in commerce themselves. I don't believe banks will cease to exist as some of bitcoin's most ardent supports hope it will, but the transaction costs for international business could drop substantially. Barring bad news on the legislative or technology front the only thing stopping bitcoin from gaining greater adoption is that too many people are psychologically fixated on an individual bitcoin. Bitcoin is sub divisible up to 8 decimal places, the vast majority of people who have heard about bitcoin that I have talked to do not realize this. Since the total number of bitcoins is fixed at 21 million this yields a total number of theoretical units of currency of 210 trillion. That's a pretty formidable island on which to create a base of trade on.

Buyer and Gov settle as a well below market price, possibly to rid of these e-tokens. Buyer then floods the market with cheap coins that are still a markup from what he bought them at. Market panics ($1000 vs $100), price of bitcoins drops.

http://en.wikipedia.org/wiki/Volume-weighted_average_price

For all other asset classes VWAP execution is a thing and a common one at that. Basic idea is split your large order up into slices and sell small amounts during a given interval. Bitstamp & BTCE have 24 hour volume of ~18k bitcoins. As a fun aside, if you don't randomize your time slice someone like me will see what you're doing and move the market to screw you :).