As I’m sure you’ve all heard by now, the feds have taken down silk road, the infamous bitcoin based drug marketplace. Of course the initial reaction of most people is to panic sell, but let’s take a look at today’s events and see if they warrant the huge drop off in price we’ve seen.

First off, when a user wants to purchase something on silk road, they’ll need to acquire some bitcoin. This causes fiat currency to be injected into the bitcoin economy, further boosting demand and value. What most people are failing to see is that once the seller receives the bitcoin, it is then converted back into fiat. A drug dealer can not run his operation entirely in bitcoin. Fiat is now leaving the bitcoin economy, and demand and value both decrease.

That is to say, the majority of the bitcoin that enters silk road eventually leaves as fiat. This sort of push/pull dynamic doesn’t have nearly as large an impact on the value of bitcoin as today’s drop in price would suggest.

In fact, 26000 bitcoins were seized as part of the raid. There’s a good chance that they will never be reintroduced into the economy. This sort of news should increase the value of bitcoin. It’s also extremely likely that another ‘silk road’ will pop up to take it’s place. The shutdown of Napster didn’t mark the end of piracy, likewise, the shutdown of silk road will not mark the end of illegal bitcoin dealings.

As I’m writing this article, BTC sits at about $93 on BTC-e. Once the initial panic fades, I predict bitcoin will creep back up towards the price it was at before this news hit.

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