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Online Currencies: What's In Store for Bitcoin After Silk Road Shutdown?

Silk Road, allegedly the largest online black market for illegal drugs, was shut down by the FBI earlier this week, and the value of Bitcoin plummeted $500 million at that instant. With the tight connection between these two, what’s in store for Bitcoin now that clandestine Silk Road has folded?

Bringing to Attention

In 2011, Attorney General Eric Holder and DEA head Michele Leonhart received a missive from US Senators Charles Schumer and Joe Manchin. The letter expressed concerns about an online black market and the “untraceable peer-to-peer” digital currency Bitcoin, after they received reports that these services were used in trading illegal drugs in secret. “Shut down the Silk Road network,” they wrote.

The senators released a copy of the letter to the press. It cited media reports that a number of tech-savvy persons used Tor, a free “anonymizing network,” for surreptitious access to Silk Road and purchase illegal substances.

Even though Silk Road continued its operations unobstructed, the letter had a direct impact on the currency used. Bitcoin prices nose-dived on the spot and continued to fall by two-thirds from its initial face value in the span of three days. The downward trend went on for several months, such that it somehow confirmed the close connection between Silk Road and Bitcoin.

Things Come to an End

Apart from the insinuations, no one in the finance industry had any inkling on the role Silk Road had on the Bitcoin economy. Since Wednesday, October 2, media outlets have gone abuzz on reports that feds shuttered Silk Road, after FBI special agent Christopher Tarbell signed the complaint against and arrest of alleged Silk Road architect Ross Ulbricht.

According to the FBI, more than 1.2 million transactions took place on Silk Road from February 2011 to July 2013. The dealings accounted for 9.5 million Bitcoins, or 4 percent of the 225 million Bitcoin transactions on the digital currency’s public block chain during the same timeframe. Silk Road had less than 4,000 sellers and about 150,000 buyer accounts. While the marketplace did play a significant role in the Bitcoin economy, it was not as large as some thought it was.

The Man Behind Anonymity

Prosecutors said Ulbricht was a regular poster on Bitcoin forums, under the name “Altoid.” Based on the court documents presented, Ulbricht was a serious Bitcoin trader and an aficionado of Austrian Economic Theory. In his posts, Altoid frequently bragged low-priced purchases and high-priced sales in Bitcoin tradings. Bitcoin became the only mode of payment when Silk Road started operations.

Later on, the legitimacy of Bitcoin economy sprung up and branched out. Despite conjectures on the involvement of gambling, people started to use Bitcoins to purchase electronic devices, grocery items, and even pay cabs.

Bitcoin went off a cliff after the Silk Road shutdown, but its condition improved fairly fast because of its diversity. When the feds shut down the online black market, the value dropped a mere 7 percent as opposed to the 66 percent drop from two years ago. According to The Genesis Block, an average day for the Bitcoin economy has seen an increase of about 2.7 percent.

For a Useful Purpose

Patrick Murck, general counsel for the Bitcoin Foundation, said feds would likely have had a more difficult time looking into Silk Road if it was based on cash. “Bitcoin isn’t this magical anonymous currency that helps people with illegal activity,” added Murck. Bitcoin Foundation is a nonprofit pushing the use of bitcoins in mainstream.

Murck told The Washington Post the Silk Road shutdown means a positive thing for bitcoins in general, and that illegal activities are a small portion compared to what and how people use the currency. He said, “If you believe that the useful purpose for Bitcoin was to conduct illicit activity, you’d expect the price to be zero without the Silk Road.” But as of this writing, the exchange rate for 1 Bitcoin (BTC) is US$137.5.

He said Bitcoin was created to open opportunities for e-commerce, a fund transfer for diaspora populations, a “financial inclusion for the global south.”

In the interview, Murck said that even though Bitcoin is private, it is not anonymous and is vulnerable to law enforcement, as irrefutably demonstrated by the fate of Silk Road. Regular law enforcement methods had enough ability to figure out and find who headed the illegal operation. “Bitcoin didn’t pose any sort of unique threat to the law enforcement community.”

Finally, Murck said Ulbricht’s lifestyle use several traditional ways and means to keep illicit trade funds out of public exposure. It seems the stringent “know your customer” methodologies and procedures of the Bitcoin industry and exchanges stopped Ulbricht from cashing out considerably.

But with all the controversies surrounding Bitcoin, it is best to understand its fundamentals. Below are frequently asked questions about the “cryptocurrency.”

1. What is a Bitcoin?

A Bitcoin is a decentralized, peer-to-peer (P2P), anonymous digital currency. Contrary to older types of electronic money, no company regulates, controls, or standardizes Bitcoin. Its guidelines are entrenched into its trading operations, together with the verification of transactions and the inflation rate.

2. Where and how do I acquire Bitcoins?

The quickest method to obtain a Bitcoin is to purchase it. Despite being the easiest way, the purchase is complicated because of stringent anti-money laundering regulations. Nearly all Bitcoin exchanges, including Mt Gox, the most popular one, call for users to wire or send money electronically from banks to the exchange. Hardcore users of the digital currency acquire more Bitcoins by running computers that make the necessary calculations for Bitcoins to work, and receiving a portion of the embedded inflation in exchange for the computations.

3. What does a Bitcoin look like?

Due to its digital nature, Bitcoins are pieces of electronic data without physical existence, even though some service providers have developed ways and means to spend it through information printed on paper notes. No matter where you find a certain amount of Bitcoins, the information embedded in it is a list of digital signatures of the past owners. The new owner adds his or her digital signature, in addition to the digital signature of the previous owner.

4. What products and services can I buy with Bitcoins?

At the moment, only a handful of mainstream services agree to take Bitcoins, although the number of supporters is on the rise and now includes pubs, fashion websites, and other online services. Bitcoins can pay for web hosting fees, purchase t-shirts, and Reddit membership.

5. What are the benefits of using Bitcoins?

The key driver in Bitcoin’s early growth was Silk Road, as it capitalized on the qualities of the digital currency to allow for anonymity to supporters and patrons. Apart from the notoriety it gained from access to illegal drugs, many fans use Bitcoin because its actuality shows that a decentralized currency without corporate control has a potential.

6. How secure is Bitcoin?

Many Bitcoin users say that the “stuff is only as safe as you make it.” All thefts reported came from external transactions, even though it did experience several bugs with programming. If users do not secure their password or “private key,” they can quickly lose it all. Once you are scammed into dispensing with your Bitcoins, you have no higher authority to turn to and the addresses used to trade Bitcoins are not attached to any kind of identity. After Bitcoins are stolen, it is almost impossible to retrieve it.

7. Will Bitcoins ever go mainstream?

Developers and economists have cited several flaws in the implementation that make Bitcoins inapplicable for extensive use. Among those problems is deflation: the Bitcoin economy only produces 21 million Bitcoins, wherein 50 percent already exist. Nearly all economists consider deflation as a tragic contraction of an economic activity, but the Austrian School of Economics think otherwise. Another problem is the obscurity whether or not it can stand up to rapidly increasing usage on the path to mainstream.

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