Prices of bitcoin are plunging today on word that anonymous black market website Silk Road has been seized by US authorities (you can check out the complete story here). As a source for illegal drugs, weapons, etc, Silk Road had become the Amazon of the black market, as it operated on the dark net, as well as used bitcoins as its payment source. As a result, it became one of the prime creators of demand for purchasing bitcoins.
Reacting to the news, prices of bitcoin on Bitstamp have fallen to a low of $85 today after trading as high as $127. Similar price declines have taken place at other leading exchanges, MtGox and BTC-e.
The question now is whether the current fall is a buying opportunity or the beginning of a drop in bitcoin prices on lower demand. Much of that answer will depend on how much demand Silk Road and similar sites really provided. In terms of estimates, in a Bitcoin Meetup held in Israel this summer, Meni Rosenfeld, Founder of Bitcoil, calculated that global monthly commerce in bitcoins was $200 million. Of that, he estimated that less than 50% was driven from gaming and black market activity. Using those figures, and the abundance of gaming related sites, it can be assumed that Silk Road, as well as similar sites attribute to less than 10% of total bitcoin commerce.
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Based on those calculations it would indicate that today’s sell-off is a bit irrational. On the other hand, the Silk Road seizure reveals that US authorities are willing to take an aggressive stance against illegal, anonymous bitcoin related sites. As such, we could easily see authorities target some of the larger gaming sites for servicing US customers. In that regard, despite real demand, prices will probably be vulnerable to additional headline risk over the near term. Specifically, seizure of any large gaming sites could probably trigger an equal if not larger sell- off.
Buy, Sell or Hold? Let us know in the comments what you think.
(Personal opinion – I am a buyer)