Why the days of Cryptocurrencies, such as Bitcoin and Ethereum, could be numbered

Screenshot from Coinbase on the 16th of July, 2017

At the time of writing, Bitcoin is down $604 US dollars from one month ago. Ethereum is down $216 dollars, but don’t worry because Litecoin is up $5 dollars!

Bitcoin and Ethereum will most likely bounce back, but these manic shifts in value look set to continue.

Right now, you could probably buy some Bitcoin or Ether, wait a couple of weeks or months and sell at a profit. It’s a relatively safe bet.

However, every time these currencies drop so drastically in value, especially when you have multiple currencies dropping in unison, you can’t blame people for wondering if, this time, it’s permanent.

I love cryptocurrencies. I find the technology and philosophy behind them exciting, however a couple of things make me worry about their longevity.

What percentage of cryptocurrency transactions are illegitimate? It’s very hard to tell.

The former founder of AlphaBay, Alexandre Cazes, who got rich facilitating the sale of drugs online using cryptocurrencies

While there are a number of legitimate vendors who accept Bitcoin, it’s still a pretty short list. On top of this, these companies don’t seem keen to release statistics on how many people actually choose the bitcoin option.

I can’t find any good sources on vendors who accept Ether, nor could I find any mainstream ones doing so.

Some of Ethereum’s proponents say that this is because it was never designed to be used as a currency in this way. You instead sell the coins as a way to pay for the underlying computation so the blockchain technology can be used for other purposes.

I don’t know of any major vendors who accept Litecoin either, however I was able to find a short list of minor ones who do on Reddit.

Basically we have a small number of legitimate vendors accepting Bitcoin as a currency, with hardly any information about how often people actually choose the bitcoin option versus others. There are essentially no big names accepting Ether or Litecoin.

The situation is very different on the darknet. If you want to buy illicit items such as drugs or weapons, there exist darknet marketplaces who will happily take your coins.

Until earlier this month, darknet marketplace Alphabay accepted Bitcoin, Ether and was planning to accept Litecoin. It was revealed on Thursday that the site was taken down after a joint operation between authorities in the US, Canada and Thailand.

The founder, a 26 year old Canadian named Alexandre Cazes, was arrested on July 5th and the servers taken down during a raid at the same time. On the 12th of July, he was found hanged in his cell in Thailand.

Alphabay wasn’t the only Darknet market, but it was one of the biggest. Some of it’s patrons have since migrated to other Darknet market sites, some will be spooked and might give it a few weeks or months before going back, and some will have lost money as whatever coins they had in their Alphabay account are now gone.

Incidentally, the value of Bitcoin and Ether have dropped significantly since Alphabay went offline. I am aware that fluctuations aren’t unusual, but it isn’t a stretch to suggest that the collapse of Alphabay has been a factor in the drop in value of these currencies.

Darknet Markets only exist because Tor works

Developed by the US Navy, tor helps people anonymously browse the internet

Tor is a tool which allows people to browse the internet whilst making it difficult for other people to track what they are doing.

It was initially developed by the US Navy, and does have legitimate use cases. An example of a legitimate use case would be people living under an oppressive regime who wish to communicate with each other securely, without their Government being able to spy on them.

However, one of it’s primary use cases is undoubtedly people accessing Darknet markets (it’s the only way to do so).

There are a number of parties actively working to try and break Tor.

A couple of years ago, the infamous Silk Road darknet market was taken down, and it’s founder, Ross Ulbricht, arrested. He is now spending the rest of his life in prison.

Ars Technica did some incredible reporting on the story, all of which is still available to read here. I highly recommend doing so.

The official story is that Silk Road was tracked down due to a bug in the code which was leaking the IP address of the server out onto the clearnet (the regular internet).

However, not everybody is convinced that this is the case.

Silk Road was shut down in November 2014. Between February and early July in 2014, the Tor network was subjected to an attack known as the CERT Tor deanon attack. CERT stands for Carnegie Mellon’s Computer Emergency Response Team. deanon stands for de-anonymize.

The researchers who carried out the attack had been planning to give a talk on de-anonymising Tor at the Blackhat security conference in August of that year, but abruptly cancelled.

Silk Road was taken down three months later, and there is speculation that the FBI used the results of CERT’s research to to track down the Silk Road servers and maybe even identify some of it’s users.

If it was possible to attack Tor in this way in 2014, it isn’t unreasonable to assume that advancements have been made since then. AlphaBay was setup in December 2014, one month after Silk Road was taken offline.

The value of cryptocurrencies is inextricably linked to the privacy of Tor

The Darknet markets still exist because the people who run them and the people who use them trust Tor to keep them anonymous. The main use case for cryptocurrencies continues to be darknet markets.

When a darknet market is taken down, the value of these currencies drops. When the general darknet marketplace ecosystem is doing well, the value rises.

There are very motivated parties out there working deanonymizing Tor. It’s only a matter of time until this happens, and when it does, no more darknet markets!

It therefore logically follows that when this happens, the value of the currencies used will fall, and never recover to the levels we see today.

We have a situation where:

  • The main use case for a currency is buying and selling illicit goods
  • The system which allows this to happen (Tor) is actively under attack and it is only a matter of time until it no longer works

If you believe that these currencies would be anywhere near as valuable as they are today if not for the darkweb, you are very naive.