A supporter of Ross Ulbricht, the creator of the black-market website Silk Road, protests outside a Manhattan courthouse in 2015.Spencer Platt / Getty

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.”

To understand why, it helps to know a bit more about the mechanics of buying drugs on the dark web. A purchaser buys bitcoin, reviews vendors’ offers on a marketplace, and then pays for his goods. His money generally goes into escrow before it is released to his vendor. This introduces a number of financial choke points and transaction delays: between when the purchaser procures bitcoin and makes a purchase, when the vendor receives the order and receives payment from escrow, and when the vendor cashes out from the marketplace. Those are all moments when bitcoin’s volatility becomes problematic. For vendors, price drops while payments are in escrow might wipe out all the profits from a sale, for instance.

Complaints about these kinds of scenarios are rife in popular forums where buyers and vendors chat online, including on Reddit. “Seems I hear Vendors are sitting on the sidelines. If payment is in [bitcoin and] then [the] price falls all their work is for nigh,” one user recently posted, worrying that fewer vendors were selling given the market dynamics at work. Another complained, “Seriously?! I purchased coins this morning at like $675 and within 1.5 hours it dropped down to $625.”

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.

That might not be a problem for an investor. But for someone who’s just looking for some weed? “If you look at the average transaction on cryptomarkets, half of transactions are something like $30 or $50,” said David Décary-Hétu, a professor of criminology at the Université de Montréal. “It makes no sense to pay a commission of $35 for $50 of drugs.” Such transaction fees become especially problematic for anyone trying to make many smaller bitcoin transactions in order to avoid the attention of the authorities—such as drug dealers.  

Bitcoin’s fees and transaction delays have also pushed darknet market participants away from the cryptocurrency. “Which markets would YOU recommend, now that the bitcoin literally became unusable in low amounts?” one Reddit forum poster asked. “How should one adapt to this? The fees got enormous, the sites I use to buy [bitcoin] set their minimum amount you can buy up to 500€.” Another commenter stepped in to advise the user, recommending a rival cryptocurrency: “Monero appears to be the way forward, at least for now: as you said, bitcoin is currently unusable for smaller transactions.”

Another posting reads: “I think [it is] officially time to step away from [bitcoin], at least for the time being. Went to do a direct deal today with a vendor, realized my $250 purchase would end up costing me $315 or so with fees and would still take probably 24 hours to get to him,” a Reddit user wrote. “As of this morning the lowest electrum fee was approx $32 to send coin.... and people reporting at the highest level still not having coin move 12-16 hours later.”

A third issue has to do with anonymity—or really, a lack of it—as law-enforcement and regulatory agencies have become more interested in and sophisticated about monitoring cryptocurrencies. Though bitcoin initially promised completely anonymous transactions, the public nature of the blockchain system in fact has always meant that savvy observers could amass huge amounts of information on bitcoin users, identifying the addresses of popular darknet markets and making money-laundering more onerous. “It’s pretty well established at this point that bitcoin is not anonymous, and it is traceable,” said Sarah Meiklejohn, a cryptography expert at University College London. “If you are buying drugs, using bitcoin is not the best bet.”

Other coins offer more privacy, and people who use darknet markets are moving to options like Ether and Monero. “Alex Cazes is dead because he believed bitcoin mixers obfuscated his money trail,” one forum poster said, referring to the founder of the now-defunct market AlphaBay and “mixers” that would supposedly hide his illicit bitcoin transactions. “My advice. Convert your bitcoins into Monero.” Another argued: “While many of us have benefited from the surge in BTC price, it’s time we left it in the past and move on to something safer and more efficient. The wave starts with getting vendors and markets on board. While making an order I urge you to ask your vendor if they have considered switching to Monero (or alternative). If more customers want to pay with Monero, vendors and markets will want to switch to where customers have money.”

Even with these three factors, bitcoin still remains the common currency of the dark web. Given the difficulty of purchasing drugs and the lucrative nature of selling them, people are willing to put up with high transaction costs. Moreover, market participants have many other prevalent risks to worry about, and transaction difficulties to deal with: the threat of law enforcement running a market as a honeypot to catch dealers and purchasers; the threat of vendors stealing their customers’ bitcoin and suddenly disappearing; whole marketplaces scamming their vendors and customers; the question of how to launder huge amounts of money converted from bitcoin. “If you want heroin, you might be willing to pay a fee, or take these risks,” said Décary-Hétu.

Plus, they have few alternatives—unlike participants in licit markets, whose advantages bitcoin-denominated markets throw into sharp relief. The dollar and euro are stable, with prices shifting just a few percent per year. Online payment systems are cheap and reliable, with credit cards charging just a few percentage points to process a near-instantaneous transaction. Contemporary financial markets are rich marvels, offering hedges, insurance, security guarantees, and a seemingly infinite variety of other products to make buying goods and doing business easy.

Not so with bitcoin. Its original promise—to be more efficient, easy to use, low-cost, immediate, and anonymous than traditional banking—has turned out to be false. One can still use it to buy drugs, of course. But not so easily.