Analysis of Silk Road’s Historical Impact on Bitcoin


Silk Road, the online drug bazaar that has eluded authorities and been ingrained in the bitcoin narrative for years, was shut down yesterday. Ross Ulbricht was named in the court documents outlining Silk Road’s activities, as were a number of key data points that offer insights into the impact the world’s most infamous retail website has had on bitcoin.

Ulbricht was caught as a result of human error and excessive risks related to physical delivery of false identification being delivered to his home address in San Francisco from Canada. After tracking the package, authorities found their way to Ulbricht and were able to compile a significant case against him (more details in the official complaint embedded below). Notably, it does not appear he was tracked as the result of any underlying flaws with tor, used for anonymous web browsing, or bitcoin, the only currency accepted on Silk Road.

For years the cloaked narcotics website has found its way into bitcoin-oriented conversations, but only now are the qualitative and quantitative data points available to asses Silk Road’s true impact on the fledgling digital currency.

A History of Influence

Facts offered by federal prosecutors overlayed onto bitcoin trading data tells a convincing story about the intertwined histories of bitcoin and Silk Road. It appears that a significant portion of bitcoin’s early traction and price gains can be traced directly to Silk Road, with that impact waning over time, most dramatically in the past six months.

On December 30, 2010, bitcoin was traded at $0.30/BTC. The court documents filed yesterday point to Silk Road’s first known publicity occurring via posts from Ulbricht on internet forums and an explanatory WordPress page beginning on January 27, 2011. Bitcoin tripled in value, reaching parity with USD, just two weeks later on February 8.

early 2011

Bitcoin then traded between between $0.65 and $0.80 for the next two months until interest was reignited by coverage in major publications, including TIME Magazine and The New York Times. In the weeks following the NYT piece, bitcoin prices and volume exploded, drawing significant attention from the media. Notably, Gawker broke a story about the Silk Road itself, pushing up the last gain of one of bitcoin’s early bubbles.

As bitcoin reached a remarkable 100x year-to-date growth at $30/BTC on June 7, the relationship between Silk Road and bitcoin would see its first true test. On June 8, 2011, Senators Charles Shumer and Joe Manchin wrote a letter to Attorney General Eric Holder, urging him to investigate bitcoin for its relationship to online narcotics purchases, as well as “urge [Holder] to take immediate action and shut down the Silk Road network.” Bitcoin plunged 66% to $10 over the next three days, trending downward to $2 by November 2011. It would seem that in 2011, direct use of bitcoin on Silk Road or speculators on its adoption comprised between 66% and 93% of the currency’s value.

2011 bubble

Over the next few months as the calendar rolled over into 2012, once again coverage from a number of important press outlets like TIME and Wired rallied enthusiasm for bitcoin, pushing prices up to a stabilized $5 by February. According to the complaint released yesterday, that is also around the time Ulbricht began to add features to Silk Road, including the establishment of a forum and “stealth mode” for top vendors.

In June of 2012, bitcoin began another rally. By this time, infrastructure in the bitcoin world had begun to increase dramatically, including the first bitcoin ASIC companies to begin advertising products and new exchanges being formed. Gawker ran another story about Silk Road in July 2012, which appears to have had positive impact on bitcoin prices, though not nearly to the extent it did previously. The months following proved to be highly transitional, with Bitcoin Foundation putting a public face on the new industry and early 2013 seeing the European financial troubles that led to the climb to $260 in April of this year and unprecedented global attention.

Just a few weeks later the markets would see another test of the relationship between Bitcoin and Silk Road. Between April 24 and May 1, Silk Road suffered a series of DDoS attacks that sent bitcoin prices sliding downwards. The negative price action was timed perfectly with the attacks, indicating a strong relationship. While the drop was significant at 35% initially before leveling off around a 25% loss – it was notably lighter than the impact of negative Silk Road news previously.

april 2013 ddos

Looking at the impact from the most recent news, we see a similar pattern emerging. Despite being the definitive end of Silk Road, with its founder detained and the logos of federal agencies plastered across the site, the impact on bitcoin prices was relatively muted. On the initial news break USD/BTC rates fell 20-35%, depending on the exchange, before settling around 10-15% lower than before the news shortly thereafter.

October 2013

Quantifiable Impact

Also contained within the filings were a number of aggregate statistics about Silk Road’s transactional volume that shed significant light on how much of the bitcoin market was built around the company’s narcotics trade. Specifically, the complaint states that site’s total revenue between February 2011 and July 2013 was 9.5 million bitcoin. Over that same period approximately 225 million bitcoin were transacted over the block chain, of which the 9.5 million in Silk Road sales accounted for just 4%.

Similarly, total exchange volume over the same period was roughly 75 million bitcoin, making Silk Road approximately 12% of total volume. This, of course, assumes all bitcoins used for purchases on the site were purchased on exchanges rather than obtained from in person transactions, mining, earnings, gifts or reused by sellers to purchase from others on the site.

Important to remember is that these figures are aggregate stats over two years of revenue. Unless fiat-equivalent sales on Silk Road were growing exponentially alongside bitcoin exchange rates over the past two years, this also means the bitcoin volume listed in the filing is front loaded into the periods when more bitcoins were required for the same fiat equivalent purchasing power. This coincides with the market reactions that also indicates a significantly reduced importance of Silk Road on the bitcoin economy.

Looking Forward

The bitcoin markets as a whole seem well poised to move forward. An unknown has been removed from the ecosystem, but a number of concerns remain.

While bitoin will likely recover, there are probably more than a few concerned bitcoin users right now. The contents of the filing pertained almost exclusively to the charges against Ulbricht, but give little insight into what other information was obtained. Whether or not home addresses or bitcoin addresses of Silk Road users were retained in some way is still unclear and the extent to which such matters are prosecutable has yet to be determined.

There is also a strong likelihood of copycat sites arising. While the recent action may deter US citizens, Silk Road was known for its global reach, meaning an aspiring entrepreneur could run a similar company from anywhere in the world. The business model is proven and the technology still apparently sound and repeatable. The downfall was related to human error, which was clearly outlined in the filing, creating an advanced watchlist for the next person to avoid. The barriers to entry are remarkably low and now paired with a known surplus of both demand and supply in the marketplace.

While Silk Road’s early impact on digital currency appears to have been quite significant, any new participant at this stage will likely encounter the same decreasing importance to the broader bitcoin ecosystem.



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