Despite being less than 5 years old, the digital currency Bitcoin will endure a huge test of sustainability as one of its biggest marketplaces has been seized by the FBI who confiscated a large number of Bitcoins in the process. The closure of Silk Road, an online market on the deep web, will drastically limit the number of outlets for Bitcoin and transactions taking place. Is the online currency trend over before it has begun?
What are Bitcoins?
Bitcoin is an online currency favoured for its anonymity and the decentralised structure in which it operates. The currency can be used globally, avoiding bank charges, has no physical equivalent and can be exchanged without being recorded or tracked. There are a limited number of Bitcoins released, keeping the amount in circulation predictable and controlled. This video offers a simple explanation:
Certain websites exist as currency converters so you can buy Bitcoins with “real world” currency and add them to your virtual wallet. A popular way to earn Bitcoins is to carry out a process called “mining”. This is where people set up their computers to aid the processing of Bitcoin transactions. In theory, any PC can be set up to solve these mathematical functions, however, they will be competing against specially designed and assembled machines worth thousands of pounds. What’s more, as only a set number of Bitcoins will ever be released into circulation, the value is constantly decreasing and earning Bitcoin is becoming more and more difficult. The cost of setting up a machine capable of being profitable, plus the cost of electricity to power it, means that efficient mining is very expensive.
Silk Road is an online trading website that runs on the private Tor network. Unsearchable on Google, the only way to access the site is to download the Tor browser and visit the address that way. The Tor network is an example of “onion routing” whereby layers of encryption are added to information making origins and identities extremely difficult to trace. The reason for this is to preserve users’ anonymity as Silk Road is primarily used for exchanging illegal goods and services. Bitcoin is the currency used to trade on Silk Road and as such has enjoyed much popularity, gaining something of a reputation as it has come to be linked to the exchanging of drugs and firearms. Silk Road too has benefited from the "secure" nature of Bitcoin with its creators enjoying a healthy windfall, raking in almost $80 million in commissions.
The alleged founder of Silk Road, Ross Ulbritcht, was arrested last week and the hidden Silk Road website was seized by the FBI, along with around 26,000 (£2.2 million worth) Bitcoins. The closure of the site, while unsurprising, could have drastic implications for Bitcoin and digital currency as a whole.
End of Bitcoin?
The value of Bitcoin took a hit immediately, as the value fell from $140 to $110. Many have predicted that the closure of Silk Road could lead to the end of the online currency, especially as the FBI have stated they will liquidate the 26,000 Bitcoins confiscated. This hasn't stopped the value from rising and it appears to be a matter of time before the exchange rate recovers. There are already talks of Silk Road 2.0, so with the publicity surrounding the closure of Silk Road 1.0 the worth could potentially increase.
If Bitcoin can survive the closure of Silk Road it could serve to validate it as a currency, however volatile. People may be reluctant to invest in Bitcoin if it is associated with drugs and illegal activity; also a precedent has now been set with the confiscation by the FBI, so the value could plummet. If not, this could be evidence for the resilience of digital currency and confirm Bitcoin’s legitimacy as a global currency.