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Virtual Currency Plummets Following Fed Seizure of Black Market Website

  +Follow October 2, 2013 11:58AM
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The digital currency Bitcoin, which just yesterday came under intense scrutiny of banking regulators in New York, tanked in value following a massive government crackdown on an illegal marketplace that exclusively utilized the digital cryptocurrency.

The Silk Road, an online market where users could buy drugs, guns, and falsified identification documents using the anonymous Bitcoins, was shut down by the FBI and ICE on Oct 1, and its operator was arrested on federal narcotics charges.  

Ross William Ulbricht, known by his nom de plume “Dread Pirate Roberts,” had been running the illegal site since 2011, and had long avoided authorities by staying cloaked in the “Deep Web,” or anonymous underbelly of the internet, via safeguards and secret servers. While arresting Ulbricht and shutting down Silk Road, the government also seized 26,000 bitcoins from Ulbricht’s virtual wallet. This amounts to .002 percent of the total amount of bitcoins in circulation.

The total bitcoin market is worth approximately $16.4 billion.

Of more pressing issue than Ulbricht's bitcoin stash to the viability of bitcoins as a functioning currency was the amout of trade the Silk Road website provided. Authorities estimate that $1.2 billion in bitcoins traded hands on the site in the last two years.

While the digital currency has its roots in the internet black market, some on the fringes of Wall Street have begun to take it seriously, and made attempts to legitimize it. The Winklevoss twins of Facebook Inc. (FB) fame have referred to Bitcoins as “the internet of money,” and “gold 2.0” and have filed with the SEC to start a Bitcoin ETF.

But as the Ulbricht case has shown, the non-fiat currency is still extremely volatile. The currency swung wildly on Wednesday, losing a third of its value as users sold off bitcoins in a panic.

In August the Department of Homeland Security seized $5 million from bitcoin vault Mt. Gox, alleging the site was operating as a money transmitting company illegally without the regulations placed on companies like Western Union (WU)

Despite critics deriding the currency as reflecting a "sub-kindergarten-level monetary understanding" as Forbes contributor Nathan Lewis asserted, Bitcoin remains popular, and continues to entice investors.

Following the panic following Ulbricht’s arrest, the currency stabilized, regaining three-quarters of the value lost in the morning panic.

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  +Follow October 2, 2013 11:58AM
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