How Bitcoin Made it Past the Black Market

Would anybody care about bitcoin if it weren’t so useful for purchasing illicit drugs and other illegal paraphernalia? The digital currency has exploded in popularity since its inception, but what makes it so valuable?

The dollar is valuable because it’s backed by the full faith and credit of the US government. It’s the only acceptable currency for US tax liabilities as well. Couple these two factors with its history and acceptance by the general public, and we have the standard currency of the United States and the safest one in the whole world.

Bitcoin only has value because people give it value. It has no history behind it. No institution or government backs it, and it can’t be used to pay taxes. Theoretically, I could print currency with my face on it, and if enough people start to accept it in trades for goods and services, then my fake currency now has some value. This is what has happened with Bitcoin. Bitcoin has been accepted by a group of people and they have assigned a dollar value to it. The dollar value then fluctuates based on the supply and demand for bitcoin.

But the question is why would anyone care enough to want bitcoins? Nobody would give my currency (despite how pretty my face is) any value because it serves no purpose. If a currency doesn’t serve a purpose, it will have no value. The reason credit cards can be used as currency is because they presented a convenience factor when they first entered the market. So the question is really: what purpose does bitcoin serve? Enthusiasts of the digital currency say it represents freedom while critics say it’s only a medium of exchange for the black market. In reality, the currency was really a staple of the black market for drugs when it first surfaced, but since then, it has turned into a real asset that people trade and perhaps has even become a real currency.

What is a Bitcoin?

Bitcoin is a digital currency. It’s created online through “mining,” which essentially involves solving a series of complex math equations to create new bitcoins.  However, there are limits to how many bitcoins can be created.

There are 12 million bitcoins in circulation with approximately 25 new bitcoins being created every 10 minutes. The developers of bitcoin are protecting the value of their currency from the forces of the market. If too many bitcoins enter the market, then bitcoin as a currency will lose value.

What is a Bitcoin Worth?

Again though, bitcoin only has value because people have assigned value to it. And as of July 17, one bitcoin is worth approximately $625. But fluctuations in the price of this asset have made it volatile…extremely volatile. Between October 2, when the Silk Road was seized by authorities, and December 4 of last year, Bitcoin went from $99 to $1,147, a nearly 1200% increase in value.  

Bitcoin and the Black Market

Because bitcoin offers a high degree of anonymity, it has become very popular in online exchanges used to buy and sell anything from illegal drugs to illegal guns. The Silk Road, the most popular site used for illegal activities that was shut down by the federal government last year, generated sales of $1.2 billion over a two and a half year period.

Of course, since the federal government shut down the Silk Road, the Silk Road 2.0 has opened up for business. And this website promises that it won’t make the same mistakes that led to destruction of the first one. In fact, some people indicate that the deep web’s market for illegal activity is back and better than ever.

And now, there’s increased competition as well. Sites like Agora, Pandora Openmarket, and BlueSky Marketplace are stealing away market share and drug listings from sites like the Silk Road 2.0.  And despite having a smaller market share, the Silk Road 2.0 is making more money than before because of the growth of the Deep Web since the raid on the original Silk Road. There are more people now than ever buying illicit goods from a whole range of different sites on the Deep Web. The FBI will have their hands full trying to take down upwards of 25 new marketplaces just like the Silk Road.  

From the Black Market to the Real Market

When Silk Road was seized, the FBI estimated that $1.2 billion in revenue was generated over roughly two and a half years (ranging from February 6, 2011 to July 23,2013). Therefore, in order to determine the percentage of total bitcoin transactions administered through the Silk Road, we need the total amount of bitcoin transactions in dollars that occurred over that time period. That number is $4,650,963,882 meaning the percentage of transactions that went through the Silk Road was 25.8%. That means a quarter of purchases made with bitcoins were for black market activities.

So yes, at one point, Bitcoin was heavily popular because of its convenience to buy drugs, but based on the enormous increase in the volume of Bitcoins traded since the Silk Road was shut down, it has evolved into so much more than just a way to conveniently buy cocaine.

Since October 2 of last year, the day that the founder of Silk Road was indicted, $23 billion worth of bitcoins have been traded over the market. Bitcoin has exploded in popularity and now, a smaller percentage of bitcoins are used for purchasing illegal drugs.

People are now holding bitcoins as assets expected to appreciate in value. They buy and sell them for trading purposes. If an asset increases in value by 1200% in less than two months, which bitcoin did just last year, it’s going to draw attention. Bitcoin is also growing in popularity because many legitimate online retailers like Overstock (OSTK), Amazon (AMZN), and Target (TGT), now accepting it as a form of payment.

So while bitcoin may have started as a black-market currency, it has evolved into an asset and perhaps even a legitimate currency. There’s no question that it’s still used as a medium of exchange for illicit activity, but as the currency continues to grow in popularity, a smaller and smaller percentage will be used for the black market. Therefore, bitcoin, often deemed an “expression of digital freedom,” seems to be poised to continue thriving.