The trial of Ross Ulbricht, which began last week in Manhattan, doesn't lack for entertainment value. The 30-year-old is accused of founding and administering Silk Road, an online market that allowed users to buy and sell illegal drugs using bitcoins as currency. Founded in 2011, prosecutors allege that Silk Road generated $1.2 billion in revenue—including an estimated $80 million paid in commissions—until the FBI shut it down in 2013. Ulbricht has pled not guilty. But whatever the verdict, the legacy of Ulbricht's high-profile case may strike a blow against Bitcoin's future viability.
The idea behind Bitcoin is simple. Unlike modern fiat currencies like the U.S. dollar, Bitcoin has no supervising authority, no regulation, and no central bank. Users can use bitcoins to buy and sell goods anonymously without any outside interference. The idea has caught on. Created in 2009 by an unknown entity called "Satoshi Nakamoto," Bitcoin has begun to enter the mainstream. Companies like Amazon, CVS, and Victoria's Secret now accept them as legal tender.
"Bitcoin is insanely traceable," Nicholas Weaver, a researcher at University of California Berkeley's International Computer Science Institute told the Verge.
As an unregulated currency, Bitcoin appeared to be a natural fit for the illicit drug market. But while Bitcoin is anonymous, it isn't untraceable. When users convert bitcoins to hard currency, their name becomes linked to a "public blockchain" that comprises the entire transactional history of the bitcoin. This would be equivalent to a $20 bill containing a comprehensive history of every person who has touched it since emerging from the printing press. These public blockchains make it very easy for law enforcement officials, once users' identities are compromised, to understand the full extent of their illicit activity.
Bitcoins, of course, are used for more than just drugs. But even in legal markets, the currency's volatility makes it an unattractive bet for would-be investors. Everyone knows that the fall in oil prices gutted Russia's ruble, which lost more than half of its value in 2014. But Bitcoin fared even worse, falling 76 percent. And unlike the ruble, which Moscow can rescue through manipulating interest rates and instituting capital controls, Bitcoin's lack of a central bank means there's nothing to stop it from sliding even further.
Why is Bitcoin so volatile? Although generally thought of (and used as) a currency, bitcoins are better thought of as an asset bubble, the Washington Post's Matt O'Brien argues. The supply of bitcoins increases when investors "mine" new ones, a process that involves using supercomputers to solve difficult mathematical equations. Because this process is expensive, miners borrow (real) money to finance it. This routine worked well in 2013, when bitcoins were worth more than $1,000 each. But when bitcoins lose their value, investors cannot mine each bitcoin to pay off their loans—a fate that struck Mark Karpeles, a Tokyo-based owner of the world's largest Bitcoin exchange who was forced to file for bankruptcy early last year.*
Ross Ulbricht's trial will focus on far more than the currency he used for facilitating the drug trade. But while Bitcoin itself will remain legal and popular, its potential to rival traditional forms of currency appear unlikely to materialize.
We want to hear what you think about this article. Submit a letter to the editor or write to firstname.lastname@example.org.