Steep transaction fees and wild price fluctuations have made the cryptocurrency harder to use in the illicit markets that originally made it famous.
Of all of bitcoin’s uses—as a currency, a payment system, an investment, a commodity, a technology, a remittance network, a market hedge—perhaps its most notorious is as a facilitator of online drug transactions. For years now, the cryptocurrency has allowed anonymous purchasers to pay anonymous vendors on eBay-like markets, avoiding the use of the formal financial system and thus the easy intervention of the federal authorities.
“Making small talk with your pot dealer sucks. Buying cocaine can get you shot. What if you could buy and sell drugs online like books or light bulbs? Now you can: Welcome to Silk Road,” the journalist Adrian Chen wrote in an exposé for Gawker on the now-defunct market, back in 2011. At the time, Chen called it “the most complete implementation of the bitcoin vision” of freewheeling, anarcho-libertarian anonymity.
Seven years later, though, problems with using bitcoin on the dark web—a kind of mirror internet that uses encryption to ensure its participants’ privacy and features websites that are not accessible from standard browsers—have piled up. Purchasers and vendors are cancelling orders, losing money, and fleeing to other forms of cryptocurrency. Bitcoin remains in wide use for drugs and other illegal goods, but the shadowy markets that made it famous, and infamous, are turning on it.
The first issue lies in the extreme volatility of the price of bitcoin. The cryptocurrency has, since its very earliest days, been a highly unstable one, its price surging and collapsing much like that of a penny stock. Even so, the past year has proven unusually volatile, with dramatic day-to-day and even minute-to-minute swings and plunges. Investors crowding into the cryptocurrency—including those putting bitcoin on their credit cards, or taking out equity loans on their houses to buy it—and regulatory interest from governments around the world have helped to drive those fluctuations. And the currency’s short-term volatility has been matched by some longer-term volatility too: The currency’s value surged 1,300 percent last year, and it has fallen by more than half of late.
For Wall Street–type investors seeking to buy and hold bitcoin or risk-happy prospectors looking to make a quick buck, such price swings are generally a feature, not a bug. Nor are they problematic for many the many Silicon Valley entrepreneurs interested in the blockchain technology underpinning the currency. But this kind of volatility is a headache for participants in marketplaces with transactions denominated in bitcoin. That means the darknet markets, which have continued to crop up and collapse since the federal authorities seized Silk Road in 2013.
On those markets, the price of drugs and other illicit and licit goods are fundamentally pegged to dollars or euros, not bitcoin. Buyers think in terms of traditional currencies, in other words: An eighth of an ounce of marijuana is worth $25, not a minuscule fraction of a bitcoin. And vendors think in the same terms, often purchasing wholesale goods with dollars or other government-issued currencies, or seeking to sell their wares for cash in person. As such, “the price of a bitcoin does not matter,” Nicolas Christin, a computer scientist at Carnegie Mellon University and an expert on the darknet markets, told me. “But that it is stable matters.”
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