Founder Of Drug Site Silk Road Says Bitcoin Booms And Busts Won't Kill His Black Market - Forbes

As the crypto-currency Bitcoin has skyrocketed in value over the last weeks and then fallen even faster, it’s produced plenty of excitement and heartache for investors. But at least one Bitcoin enthusiast has been nonplussed by Bitcoin’s volatility: the entrepreneur who goes by the name the Dread Pirate Roberts, founder of the black market site Silk Road, where visitors can use Bitcoins to buy practically any illegal drug imaginable.

In a rare (and brief) public statement sent to me, the Dread Pirate Roberts (DPR) said that despite Silk Road’s reliance on Bitcoin, commerce on the site hasn’t been seriously hurt by Bitcoin’s wild rise and fall. “Bitcoin’s foundation, its algorithms and network, don’t change with the exchange rate,” the pseudonymous site administrator writes. “It is just as important to the functioning of Silk Road at $1 as it is at $1,000.  A rapidly changing price does have some effect, but it’s not as big as you might think.”

Silk Road’s customers, after all, aren’t generally interested in Bitcoin’s worth as an investment vehicle, so much as in how it makes it possible to privately buy heroin, cocaine, pills or marijuana. They use Bitcoin because it’s not issued or stored by banks and doesn’t require any online registrations, and thus offers a certain amount of anonymity. (While those privacy protections are far from perfect, they can be increased by using so-called “laundry” services that mix users’ Bitcoins together and reissue them random ones to make any individual coin harder to trace.)

Silk Road has built-in protections against Bitcoin’s spikes and crashes. Although purchases on Silk Road can only be made with Bitcoin, sellers on the site have the option to peg their prices to the dollar, automatically adjusting them based on Bitcoin’s current exchange rate as defined by the central Bitcoin exchange Mt. Gox. To insulate those sellers against Bitcoin fluctuations, the eBay-like drug site also offers a hedging service. Sales are held in escrow until buyers receive their orders via mail, and vendors are given the choice to turn on a setting that pegs the escrow’s value to the dollar, with Silk Road itself covering any losses or taking any gains from Bitcoin’s swings in value that occur while the drugs are in transit. So while Bitcoin’s crash last week from $237 to less than $100 means that the Dread Pirate Roberts was likely forced to pay out much of the extra gains Silk Road made from Bitcoin’s rise, most of his sellers were protected from those price changes and continued to trade their drugs for Bitcoins despite the currency’s plummeting value.

As a result, only about 1,000 sales listings out of more than 11,000 were taken off the site during the crash, according to DPR. “Those were from vendors who didn’t protect themselves,” he (or she) says. “The volatility only hurts vendors who don’t hedge their escrow balance.”

In fact, Bitcoin’s bubbles may be a bigger problem for Silk Road than its busts. In the site’s forums, some users have noted that they’re reluctant to spend their Bitcoins when they’re appreciating so quickly. In some cases, vendors can make also make more by simply holding onto the Bitcoins they earn, rather than trading them for dollars to buy more drugs to sell.

One Silk Road buyer and small-time drug dealer with the name Joey Terrifying writes that he used the site to buy a gram of Molly, a form of ecstasy, with the intention of quickly selling it to his own customers. By the time he’d sold it three weeks later, Bitcoin had risen in value so much that it dwarfed his profits from the drug sales. “I would have more money now if I had just done nothing at all,” Terrifying laments.

“Hoarding is the rational response to runaway deflation,” adds one user with the name Astor. “If I spend $100 on drugs now and the price of [Bitcoin] doubles in a week, then I’ve effectively spent $200 on those drugs by next week.”

But Silk Road has one sustaining advantage: Buyers of drugs, unlike other goods, may be more willing to pay for their pleasure even if it means missing a big investment opportunity. As Astor points out in his comments on the forums:

What keeps [Silk Road's] business afloat in this deflationary period is the large percentage of irrational actors in the drug community. I think they fall into two categories: 1. Ignorant/uninformed people. These are people who just want drugs and don’t follow bitcoin. They buy when they need coins and spend immediately. 2. Addicts. People who need their drugs and will pay for them, despite knowing that they could buy twice as much for the same money in a week.

Another user by the name of AllDayLong chimed in to agree with that theory, using his or her own drug consumption as exhibit A.

“Maybe for people capable of watching the prices pretty consistently that would work, but I can’t do that,” the Silk Road customer writes. “But, if I deposit my $100 and spend it on the drugs I want right away then I get my drugs and I am happy.”

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