One of the best things that Bitcoin has going for it is that there are places online where it’s used exclusively.
The infamous site SilkRoad is a marketplace for drugs and other illegal wares, where Bitcoin is the currency of choice.
Izabella Kaminska points to a report from Willard Foxton at The Telegraph, who says that the site is on the verge of collapse, under intentional outside threat, and also suffering from hyperdeflation.
We’ve written on the hyperdeflation problem before. Basically, with Bitcoin prices surging, nobody wants to buy anything, you just wnat to hold onto your Bitcoins. Conversely, when they collapse, nobody wants to sell. So volatility means nobody wants to transact in Bitcoins, because there’s a good chance that the next day someone will feel like a fool.
Here’s Foxton on the SilkRoad attacks, and the lack of transactions:
Silk Road is now offering $5000 to anyone with any “information that leads to the arrest and conviction of whoever is behind this extortion attempt”. Although phoning up the cops and saying “some guy is blackmailing my giant drug-dealing operation!” probably won’t elicit much sympathy.
Of course, it might also be the natural consequence of Silk Road users paying for goods using the encrypted digital currency Bitcoin.
As an economy where Bitcoin was the main currency, Silk Road recently went through a hyper-deflation almost unprecedented in economics. Following the recent surges in the value of Bitcoin, people have been selling less and less, initially because the value of the Bitcoins was going up so fast people were unwilling to part with them; then, once the Bitcoin price started crashing, dealers were unwilling to part with valuable drugs for Bitcoins worth who-knows-what.
The good news for Bitcoin is that prices have been a lot more stable lately. If that stability can last for a while, at least people will feel more comfortable buying and selling goods in the currency, rather than just speculating on its rise and fall.