The FBI and the legitimation of the bitcoinverse

By Felix Salmon
October 2, 2013
Zero Hedge is at his most apocalyptic this afternoon, saying that "the end may be nigh" for bitcoin now that Silk Road, the bitcoin-fueled drugs bazaar, has been closed down by the Feds.

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Did the FBI just deal a fatal blow to bitcoin? Zero Hedge is at his most apocalyptic this afternoon, saying that “the end may be nigh” for bitcoin now that Silk Road, the bitcoin-fueled drugs bazaar, has been closed down by the Feds. Even Adrian Chen, who has done most of the best reporting on Silk Road, was shocked by what the FBI found:

According to the indictment, Silk Road was bigger than anyone had suspected: It boasted over $1.6 billion in sales from 2011-2013, which resulted in $80 million in commissions. (Researchers had previously estimated that Silk Road was doing about $22 million in total sales per year.)

Chen, too, sees today’s news as bearish for bitcoin: “the extent to which Silk Road underpinned the Bitcoin market is pretty amazing,” he tweeted. After all, the complaint reveals that from February 2011 through July 2013, Silk Road’s revenues totaled 9,519,664 bitcoins — that’s almost as many as the total number of bitcoins in circulation (11,744,575).

But although I’m skeptical about bitcoin’s future, I don’t see today’s news as bad for the cryptocurrency. In fact, quite the opposite. If Silk Road is now shut down and if no one else manages to enter the vacuum caused by its disappearance, then the FBI will at a stroke have managed to remove the single skeeviest aspect of bitcoin, and the main reason why people like Chuck Schumer are so suspicious of it.

On top of that, the numbers in the FBI complaint are highly misleading. The complaint says that Silk Road’s total revenue, of 9.5 million BTC, and commission, of 614,305 BTC, “are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates, although the value of Bitcoins has fluctuated greatly during the time period at issue”. That’s putting it mildly. Here’s how Chen described Silk Road back in June 2011:

Mark, a software developer, had ordered the 100 micrograms of acid through a listing on the online marketplace Silk Road. He found a seller with lots of good feedback who seemed to know what they were talking about, added the acid to his digital shopping cart and hit “check out.” He entered his address and paid the seller 50 Bitcoins—untraceable digital currency—worth around $150. Four days later the drugs, sent from Canada, arrived at his house.

Those 50 bitcoins are part of the FBI’s 9.5 million BTC total, but rather than being worth $50, the FBI is now valuing them at about $6,300. As a result, the $1.2 billion number should be taken with a monster pinch of salt. Besides, if you consider that the FBI is looking at 898 days of Silk Road activity, that averages out at a pretty modest 10,600 BTC per day. That’s hardly the “underpinning” of the bitcoin market, which normally sees somewhere between 200,000 BTC and 400,000 BTC per day in total trading volume.

The US government doesn’t seem to have a reflexively negative attitude towards bitcoin: in a letter sent on August 12 to Janet Napolitano, Senators Thomas Carper and Tom Coburn write that while virtual currencies come with “threats and risks”, there should also be “a sensible regulatory framework” which will “ensure that rash or uninformed actions don’t stifle a potentially valuable technology”. Meanwhile, while Treasury certainly wants to regulate such currencies, they don’t seem to want to outlaw them.

In other words, for anybody wanting to see the broader adoption of bitcoin, the shuttering of Silk Road should be considered a necessary and very welcome step — and one which will help support its value over the medium term. Sure, the price fell today — but not egregiously so: it was about $140 in the morning, briefly fell as far as $110, and is now back to $125. By bitcoin standards, that’s a surprisingly low amount of volatility on a big-news day. And with Silk Road gone, a significant source of downside tail risk has now been effectively removed from the bitcoinverse.

So if the shuttering of a significant source of bitcoin demand isn’t bad for the currency, what would cause its demise? The answer is basically just neglect. Bitcoins are a fad, and they’re a fad which will pass, a bit like Beanie Babies. There was no one thing which caused the market in Beanie Babies to implode, it was more that people just moved on to other things. Bitcoin’s the same: newer, shinier virtual currencies will arrive, the techno-utopians will latch onto something else, and eventually the people holding bitcoins will understand that if an asset doesn’t throw off any cashflow, the only way to make money from it is to sell it at a higher price than you bought it. In other words, bitcoin is the ultimate speculative vehicle, one which you might be able to trade in and out of, but one which has no value at all as a buy-and-hold investment. Which is something to bear in mind when you read the next big Bloomberg article on bitcoins as an asset class.

4 comments

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The basic problem with assuming that the FBI taking down Silk Road is a benefit to BitCoin by removing an unsavory association sullying the reputation of the currency is that it is far too easy for anybody to throw up a replacement site.

And now that lots more people know what kind of revenues they can get from illegal online drug dealing, we can pretty much count on replacement sites springing up.

Let’s face it, in the present day U.S. drug dealing is the default employment program for the lumpenproletariat, and now that the size of the potential market is out of the bag, it’s only a matter of time before one or more sites that do exactly what Silk Road did are online, with more precautions and stronger protections for privacy.

Posted by Strych09 | Report as abusive

Everyone who ever dealt with Silk Road is going to be pretty nervous. That’s quite a black book the Feds got hold of.

There’s a sphere where dollars are suboptimal for transmitting value electronically. In addition to contraband, the US doesn’t want Wikileaks, the Pirate Bay, some people in Iran to have access to the payments system.

Bitcoin is a good investment if that sphere gets larger. It’s a hedge against the dollar sphere getting less attractive. It also serves as a workaround so the US can’t use the electronic payments system too much for its political and foreign policy agendas.

If you kill Silk Road, that Bitcoin sphere is getting smaller, so the first order effect is clearly not great for Bitcoin.

If there’s a plan is to make Bitcoin totally legitimate and force everything in the Bitcoin ecosystem to have the same controls as the dollar ecosystem, making the early adopters rich but destroying it as a black market medium of exchange… at which point it would be less useful than dollars and ripe for complete collapse…it would be an interesting plan.

Posted by druce | Report as abusive

Silk Road, and the legion of mini-Silkies being prepped, are an effective attack on a truly evil industry. They take money out of the hands of international criminal syndicates and street gangs, the devalue the drugs market by offering drugs at far lower street prices; and they promote purity saving tens of thousands of people from the poisons that adulterate street drugs.

They can disrupt the drug industry more quickly, and more effectively, than the war on drugs has managed in two decades. Society then can focus on the roots of drug use and addiction instead of having the drugs business corrupt hundreds of thousands in positions of authority, and tens of thousands of murders a year. Better the Silkies fight over Google keywords in online auctions than murder and behead each other.
http://zd.net/19kxsYZ

And as for Bitcoin, it’s gone beyond a fad. It has very unique properties. In a digital world where everything is so easy to copy, you can’t copy a bitcoin. That’s very valuable and scarce.

Posted by tomforemski | Report as abusive

So Bitcoin = Beanie Babies…

I’ve read all your Bitcoin articles and more and more they seem to be written as hopeful “I told you so” with little downside risk if the author is wrong.

I’m sure if and when Bitcoin is mainstream as an asset and perhaps as a currency as well, you’ll just write “While I didn’t think that blah blah blah, blah blah blah happened and changed the blah blah blah that I based my original opinions on. However, if it hadn’t been for that one blah blah blah I would have been proved correct.

My money is on you looking like the internet skeptics of 1996.

Posted by windjc | Report as abusive