Of course, licit markets have the exact same vulnerability to swings in the price of bitcoin. But those markets—with their deep-pocketed investors and ties to the formal financial system—have come up with ways to avoid them. “Merchants who want to avoid volatility will still accept bitcoin or cryptocurrency, and can use a service provider that automatically converts it,” Jerry Brito, the executive director of Coin Center, a nonprofit research and advocacy organization for cryptocurrencies, told me. “That service provider accepts bitcoin on their behalf, automatically converts it, and deposits dollars into the merchant’s account. That way they never face the volatility.”
But such businesses want nothing to do with illegal markets, meaning that marketplaces, vendors, and buyers have few if any ways to hedge. Some drug dealers urge their customers to “finalize early,” letting their payments out of escrow before they receive their goods. And some marketplaces have built in their own mechanisms to help manage volatility. Indeed, the original Silk Road provided a kind of insurance system against volatile cryptocurrency prices. “Ross Ulbricht was a very smart young man who got into a line of work he should not have been involved in,” said Christin, referring to the creator of Silk Road, who was arrested in 2013 and is now serving a life sentence. “He had very clever ideas, like this hedging system that exists in banks.” But other markets do not have the technological wherewithal to do so, or the willingness to absorb any volatility risk from their customers and vendors. As a result, many vendors cancel orders, or requests that their buyers cancel orders, to manage the swings.
It is worth noting that volatility has proven less of a problem when the price of bitcoin was shooting up, as buyers and vendors holding bitcoin found their currency worth more and more. (Indeed, in forum posts, some vendors note that they have made more money holding bitcoin than selling drugs.) But a crash in the price of bitcoin gives vendors far less of an incentive to do business on the darknet markets. “Volatility upwards is, of course, largely a good thing for [the darknet markets], as they produce a wealth effect,” wrote Gwern Branwen, a cryptocurrency researcher who goes by a pseudonym, in an email. Branwen added, “The really bad thing is when prices crash. This sets up an ugly dynamic for sellers: typically you still have to pay your expenses and your supplier in a fiat, so do you continue shipping out orders pre-paid with bitcoins which are now worth a lot less and may well incur a loss?”
The second reason bitcoin is falling out of favor on the dark web has to do with the sudden increase in the cost of transacting in bitcoin. Here, again, it helps to get into the technical details for a moment. All bitcoin transactions are kept in a decentralized and public ledger. When someone makes a transaction with bitcoin, miners in the network solve cryptographic puzzles to verify and log it—and get paid a small fee in bitcoin to do so. That has given the cryptocurrency a scaling problem: As demand for transactions has gone up, the price to transact has gone up. Indeed, the price of a bitcoin transaction recently spiked as high as $55.