Since Bitcoin has become more of an accepted form of monetary transaction across the internet connected world, the bubble burst that hit its value last week, was going to be felt far and wide. It's not surprising then that one of the places that helped pioneer the currency has been hit too – that place is Silk Road.
For those that don't know, Silk Road is an online marketplace, only accessible via the Tor network, that sells a variety of products, ranging from collectibles, to fake IDs – but its biggest catalogue of products is drugs. And we're talking everything too: from cannabis, through to heroin and prescription medication. If someone wants to take it, Silk Road has it – and all of it is purchasable using Bitcoin.
Let's be clear from the start, KitGuru neither condones or supports this kind of activity and, where possible, we steer around specifics with this kind of story – because the details could be mis-used. In this case, the various components are important, so we have taken a conscious decision to include them.
The purchasing process works in a fashion familiar to anyone who's bought anything online. Once you've added the Bitcoins to your account (which sends them through a tumbler which further anonymises them) you click “add to cart” on the product you want, send off your postage information to the seller (PGP encryption is recommended by the site's owners and most sellers) and your money enters a temporary escrow account. This holds the money until your product arrives and you “finalise” the payment, which sends it off to the retailer.
It's this holding period that could potentially cause problems for the Silk Road, but it does have safe guards in place. Sellers are able to “hedge” payments, which means that whatever the dollar value of the Bitcoins when they are finally sent to the seller, Silk Road will provide the same dollar value as when there were added by the buyer. This protects everyone, theoretically.
However, even doing so cannot guarantee safety. One source contacted us to explain: “I received a message a few days ago from one of the people I usually order from. It explained that those of us with outstanding payments should not finalise until an issue with Silk Road has been corrected.” Apparently, the seller in this case – one of the most well reviewed on the site – has taken down all of its listings. Despite having its payments hedged, it describes Silk Road pricing as “broken,” because it's based on that of Mt Gox. exchange, which a few days ago froze Bitcoin values. This meant people were buying up coins on other exchanges for far less and exploiting the system.
Ultimately the seller was said to be down several thousand dollars. However, our source informs us that most of that seller's listings are now back online, which would suggest the pricing problem has now been fixed, but it highlights a potential problem with Silk Road's reliance on the Mt. Gox exchange values.
Speaking with Forbes a couple of days ago, the anonymous owner of the site, Dread Pirate Roberts, described the safety measures in place by Silk Road, how ultimately the site itself pays for the ups and downs in Bitcoin value, while the sellers and particularly buyers, should be relatively unaffected by the crash. Ultimately though it's the time your Bitcoins are travelling between wallets, that value changes can really affect you. Once an order is made, you're relatively safe – though it seems not all sellers have been.
KitGuru Says: I'm sure a few of you are tempted to search out Silk Road after reading this. We wouldn't recommend it, but if you do, make sure you find an official address – there are a lot of fake ones floating around that could easily scam money from you. Be safe.