How Does Illegal Activity Involving Bitcoin Affect its Price?

Bitcoin has suffered from an image problem since its inception. Mainstream media, along with those who rely on it for information on the world around them, have rarely seen more than a quirky internet phenomenon that enables hackers to trade illicit data, drug dealers to operate complex international organizations, and anarchists to dodge taxes. The truth, however, is that bitcoin is a growing and thriving economy where almost any legitimate consumer good or service can be attained from someone who accepts bitcoin as payment. 

As the bitcoin economy has grown, examples of its more nefarious uses continue to pop up in reports of major media outlets. The public hear stories about an online black market where huge volumes of illegal narcotics are sold, a virus that will lock up all of your files unless you purchase bitcoins and send them to the attacker, or even last week's leak of celebrity "selfies" that were traded for bitcoin in disreputable corners of internet forums. These reports have cast a dark shadow over bitcoin in the eyes of the general public. It is fair to wonder whether this type of attention has a negative effect on the price of bitcoin in currency markets.

However, when the roots of bitcoin are examined we can see that it was primarily used on the dark web in its infancy; a favorite tool for hackers and drug traffickers. While hard data is extremely hard to come by, we can assume that less than legal activity represented a significant portion of the economy at that time. Even for law-abiding bitcoiners, this would serve to help bitcoin maintain its value in currency markets, which would have driven the virtuous cycle of adoption.

So, when we look at the bitcoin economy, does its utility to wrongdoers help or harm the currency as a whole? In truth, it was probably somewhere between extremely helpful to crucial in the early stages of the economy. At this point, I think that negative news probably has a fairly neutral effect as the increased publicity and the trepidation it adds come out to a wash. As the quality of the public's education about bitcoin improves, the fear factor will probably decrease.

The most important thing to remember is that as the economy matures, there will be more and more legitimate commerce going on which will serve to dilute the portion of the total market that supports illegal activity. The same is true for the significance of publicity and new market participants (although we are still in a stage where this is important). 

So while the dark web and its inhabitants are important to bitcoin's history, the factors that affect the short term changes in bitcoin's value are beginning to shift to more fundamental changes in how people are using bitcoin and its place in the global economy. Important things to watch at this juncture include the integration of bitcoin into existing ecommerce infrastructure or large VC investments into developing more powerful ways to use bitcoin.