The End of the Silk Road: What Does This Mean for Bitcoin?
What the FBI shutdown of the Silk Road underground marketplace means for the digital currency Bitcoin
The Feds have struck, shutting down the online marketplace The Silk Road and arrested the administrator of the site, who goes by the pseudonym Dread Pirate Roberts. The site has been closed, and a 29-year old man has been arrested. The site was alleged to be a marketplace for drugs which could be purchased using Bitcoins. The digital currency was the only way to pay for purchases, and the site offered an escrow service that held the money until a buyer received them. So, what does this mean for Bitcoin and other digital currencies?
What is Bitcoin?
Bitcoin is a decentralized, non-fiat digital cryptographic currency. What that means is that there is no central authority that runs Bitcoins, no central bank or organization that creates and distributes it. Instead, the currency is run by the people who use it, according to a set of rules laid down by the creator of Bitcoins, a shadowy figure called Satoshi Nakamoto. The currency is based on cryptography, using a cryptographic function called SHA-256. To create the coins, computers crunch numbers using this function (called Bitcoin mining), and the mathematical proof of their hard work becomes the coins. To use Bitcoins, you need a Bitcoin address to send and receive them from. These addresses look like this:
1LpHb1vuizy98uMe8xfiq1J2cQWiqF5ae8.
These addresses are like your bank account or credit card number, but they can be generated by anyone, online or off. A web site called Bitaddress can create them automatically, but the creation process is simple. (Well,for a computer, anyway: it involves crunching a lot of numbers.)
To send someone Bitcoins, all you need to know is their Bitcoin address.
Every address has an accompanying private key, which looks like this:
5JKDYC2gs8wJpSQ9GRocRCoVbWX7fMLnJqXXuFGT5sqqWiG7wyo.
This private key is the important bit: this allows you to control the Bitcoin address, and send coins from the address. If you don’t have the private key, you can’t get at the coins at that address. This combination of the address and private key is called the Bitcoin wallet. There are lots of online services (like Blockchaininfo and Coinbase) that can host a Bitcoin wallet for you, so you don’t have to remember the private key. They store it for you, and you use a password to log into their site.
When you spend Bitcoins, your transaction is recorded and verified by many other computers connected to the Internet. Every Bitcoin transaction is stored in this ledger of transactions, called the Blockchain. This information can be accessed by anyone: if you go to the site Blockchaininfo, you can see the transactions scrolling by. This ledger contains the details of every Bitcoin transaction ever, detailing where it came from, where it went and how much was sent. So, anyone can look up these details and track coins as they move from address to address.
Is Bitcoin Anonymous?
Not really. Because a Bitcoin addresses can be created anywhere (unlike a credit card), you can’t work out what address a user is using: while most people use one address, there is nothing to stop a user from creating multiple wallets, and moving coins between them to make it harder to find them. This makes it hard to link a Bitcoin address to a specific user of a web site.
However,it is not impossible. Researchers have demonstrated that with a bit of information (such as the amount of Bitcoin spent and an address), they could track coins as they moved around the Bitcoin network. As the FBI seized the servers that The Silk Road was running on, there is a good chance that they could work backwards from these records and the blockchain to find which address sent the coins, and use that information to locate the buyers and sellers of the illegal substances allegedly sold on the site.
Can Bitcoins Be Destroyed?
Yes. Well, sort of. If you send coins to a Bitcoin address and loose (or destroy) the private key, there is no way to regain access to these coins. Experts say that it would take many millions of years of computer time to work out a lost private key, so the coins are effectively lost. Think of it like forgetting your PIN for your ATM card, except that there are 100,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 (or 1^77) possible combinations to try, and there is no phone number to call and reset it.
Will the Silk Road Bust Destroy Bitcoin?
No. Although the Silk Road was a place where a lot of Bitcoins were spent (the FBI estimates $1.2 billion worth over the lifespan of the site), there are lots of other places that use Bitcoins. These include businesses large and small, such as Foodler, BitElectronics and many others. However, it looks like the price of Bitcoins is falling after the news of the raid was released, and the number of Bitcoin transactions has fallen. It remains to be seen if this is a permanent drop, though.
Are Bitcoins “Real Money?”
Yes. Merriam Webster defines money as “something (such as coins or bills) used as a way to pay for goods and services and to pay people for their work”. By that definition, Bitcoins are as real as the cash or credit cards in your pocket,because they can be used to buy things, such as the Indian food I had for dinner last night. That tasted very real.
How Many Bitcoins Did The Feds Seize From Silk Road?
Lots. Although the FBI did not reveal the precise amount, the criminal complaint against the alleged head of the Silk Road claims that the site regularly had more than $2 million worth of Bitcoins held in escrow, where the site stored the Bitcoins until a buyer received their goods. If it was a typical day, the Feds probably nabbed this along with the servers and other equipment when they arrested Dread Pirate Roberts. You can read the criminal complaint here.
Is the Amount of Bitcoins Seized Significant? Will This Destabilize the Currency?
Yes, but probably not. If we assume that the amount seized was about $2.5 million, that works out to about 21,000 Bitcoins. The total number of Bitcoins in circulation at present is about 11 million, so the seized funds are less than 2% of the Bitcoins out there. That is a lot, but probably not enough to destabilize the currency permanently. It is also too early to tell what the FBI may do with this money: they have previously used seized drug money to fund drug enforcement efforts through the US Department of Justice Asset Forfeiture Fund, so your local FBI office might be getting some Bitcoins to spend in the near future.
Do you have questions about Bitcoins or digital currency in general? Ask them here and we’ll do our best to answer them.
