Bitcoin will bounce back from Silk Road scandal, users say

There is no doubt that the media attention surrounding the shutdown of Silk Road, an anonymous online marketplace for illegal drugs and other illicit goods, has hurt the already fragile reputation of bitcoin, the digital currency used as payment on the website, but thebitcoin faithful say the scandal hasn't deterred people from using the currency.

"We had one of our busiest day on Wednesday,"said Jackson Warren, co-founder of Bitcoiniacs, a Vancouver-based bitcoin broker. "People were looking to buy bitcoins. I had no one interested in selling."

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Silk Road's owner, Ross William Ulbricht, 29, known online as Dread Pirate Roberts,was arrested in San Francisco on Wednesday andcharged with one count each of narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. Ulbrichtis also accused of trying to hire a Silk Road user to kill another user, based inWhite Rock, B.C., who threatened to expose the names of thousands of people who used the site.

He appeared in court Friday for a bail hearing, which was delayed until Oct. 9 at the request of his lawyers.

The Silk Road website, which has been around since 2011, was known primarily as a platformfor vendors of a wide array of illicit drugs thatincluded everything from heroin to ketaminebut alsoallegedlyfacilitated the sale of other black market goods such as malicious software and weapons.

The site, which had been written about in themedia in the past, often in connection withbitcoins, has been shut down, although web pages could still be found detailing how to access it, a process that relied on Tor software, which encrypts and bounces communications through numerous relaysin order keep users anonymous.

Silk Road won't have lasting impact

Silk Road's closure has been welcomed by Canadian bitcoin users, who say that the site had brought unwanted attention to the digital currency.

People thought Silk Road would have a larger impact, but what we're seeing is that it was only a small part of the larger community that will soon be forgotten.-Anthony DiIorio, BitcoinAlliance of Canada

"Silk Road was a negative aspect of the bitcoin world that received a lot of press," said Anthony Di Iorio, founding member of the Bitcoin Alliance of Canada. "In my opinion, it wasn't that big of a deal.

"Bitcoin is showing its resilience. People thought Silk Road would have a larger impact, but what we're seeing is that it was only a small part of the larger community that will soon be forgotten."

Bitcoins can be traded person to person in individual transactions or through various unregulated exchanges that exist mostly online but also include physical exchanges like the Bitcoin Store in Vancouver. Online tools also exist for users to locate bitcoin sellers.

Bitcoins are stored electronically and traded against each other or traditional currencies. The price of bitcoins is determined by supply and demand.

Volatile currency

Following the Wednesday raid on Silk Road, the price of bitcoin on Mt.Gox, one of the main exchanges that trades the currency, fell almost nine per cent, starting the day at $141 US and at one point falling as low as $109.70.By late Friday, the currency was back upat around $139.

Bitcoin has been criticized in the past for being too volatile of a currency. This year alone, the currency has seen fluctuations on Mt. Gox as wide as$13 at the start of the year to $266 inApril.

But bitcoin users say the ups and downs are merely the growing pains of a small currency market that has only been around since 2009.

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"Many countries'currencies are actually more unstable than bitcoins,"Di lorio said. "It's a very young currency;price fluctuations are expected."

The Economist has also pointed out that the volatility is in part due to the fact thatthe bitcoin economy, which the publication calls "Bitcoinia,"relies heavily on the bitcoin's exchange rate against the U.S. dollar.

"Almost every good one can purchase with bitcoins is actually priced in dollars and sold at a bitcoin price reflecting the prevailing exchange rate,"wrote RyanAventin an April 11, 2013, article in the magazine.

"Bitcoinia mostly lacks internal supply chains, in which contracts for intermediate goods are denominated and settled in bitcoins. People aren't taking home bitcoin paycheques.

"To put things simply: every good in Bitcoinia is an import and every job must be offshored."

But Avent predicts that will soon change.

"The more transactions there are in Bitcoinia, the more entrepreneurs will want to hedge their exposure to foreign exchange volatility by paying suppliers or employees in the same currency they're accepting as payment," he wrote.

Reputation won't be hurt inlongterm

In the days following Ulbricht's arrest, the focus has turned to how the shutdown of one of the most notorious bitcoin users will affect the reputation of the currency, one that hasalready been tarnished by its association with money laundering, tax evasion and other criminal activities.

With the price of bitcoins fluctuating on the news of Silk Roads shutdown, some have speculated that the scandal might mark the start of the virtual currency's collapse. However, members of the Canadian bitcoin community feel that the shutdown of the site itself and the arrest of its owner are enough to repair the currency's tainted image.

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"Now that Silk Road is gone, bitcoin's reputation is already enhanced,"says Di Iorio. "Nothing necessarily has to be done to untarnish this."

Despite the virtual currency's association with illegal activity, it isgaining wider acceptance as aform of payment and there are many legitimate companies that accept bitcoins, including the popular news aggregator Reddit, the publishing platform WordPress and the dating website OkCupid.

Last year, a bitcoin exchange in Europe, Bitcoin-Central, was authorized to operate as a bank, getting its own international bank ID andbecoming a registered payment services provider along the lines of PayPal.

More recently, Cameron and TylerWinkelvoss, the twin brothers known for their feud with Facebook founder Mark Zuckerberg, launched plans to start an exchange-tradedbitcoinfund that would enable the digital currency to be traded like stocks.

What are bitcoins?

Bitcoin users describe the currency as the first decentralized electronic currency that isn't controlled by any government or organization. Bitcoins can be purchased with traditional currency and traded anonymously for goods and services. There are no set transaction fees and the currency can be sent anywhere around the world in a similar fashion to the way electronic transfers are done in online banking but using bitcoin-specific digital addresses and encryption protocols.

The digital currency is generated by thousands of so-calledminers.These are people who, working individually or in groups called "mining pools,"use powerful computers to run software that solves a series of mathematical puzzles. Each time theminer solves the puzzle,they receive bitcoins, which they can trade for currency or otherwise put into circulation.

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As part of the mining process, miners validate and logalltransactions in the bitcoin network. To have atransaction validated more quickly, users can build a mining fee into their bitcoin trade, usually a small percentage of the transaction paid to the miner.

The algorithm on which the system is designed guarantees that there will never be more than 21 million bitcoins generated. Currently, there are about 11.75 million bitcoins in circulation.

Silk Road alonereportedly generated sales amountingto a whopping 9.5 million bitcoins in the two and a half years it existed, with 600,000 bitcoins of that in the form of commissions to the site itself. In its civil forfeiturecomplaint against Ulbricht, the Federal Bureau of Investigation estimated the dollar equivalent of those transactions at $1.2 billionand $80 million in commissions.

The FBI has so far reportedly only seized 26,000 bitcoins from the accounts of Silk Road users but not Ulbricht himself.

Not the first scandal

The Silk Road raid is notthe first time bitcoins have attracted negative attention. Just this past May, competitive video game league E-Sports Entertainment League (ESEA) apologized to its users after admitting to harnessing their computer power to generate bitcoins without consent. The ESEA donated the $3,713 worth of bitcoins it mined to the American Cancer Society and matched that amount with an additional company donation.

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In 2011, the currency was implicated in a suspected Ponzi scheme that led to a key U.S. court decision that declared that bitcoin is a true currency and that peopletradingin it can be subjectto the Securities Act, for example.

Bitcoin user Trendon T. Shavers, who called himselfPirateat40, launched a website called Bitcoins Savings and Trust, which claimed to give people a seven per cent weekly return on their bitcoin deposits. He later shut down the site after collecting more than700,000 bitcoins.

He was charged with defrauding customers of $4.5 million and when he tried to argue in court that bitcointrading amounts to a game and thathe had simply figured out how to win the game, a Texas judge ruled that bitcoins have real value and can, in fact, be treated as currency. That judgment cleared the way for the U.S. Securities andExchange Commission to charge Shavers with defrauding investors, which it did this past July.