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Silk Road Founder Says Bitcoin Booms And Busts Won't Kill His Black Market

77 points by Lightning 13y ago

drewblaisdell 13y ago
To insulate those sellers against Bitcoin fluctuations, the eBay-like drug site also offers a hedging service. Sales are held in escrow until buyers receive their orders via mail, and vendors are given the choice to turn on a setting that pegs the escrow’s value to the dollar, with Silk Road itself covering any losses or taking any gains from Bitcoin’s swings in value that occur while the drugs are in transit. I was wondering exactly how vendors could have withstood a > 50% loss of value while their Bitcoins were in escrow. Silk Road is a remarkable service and provides an experience that will keep the value of Bitcoin alive at some level for a long time.
- corin_ 13y ago
  So while Bitcoin’s crash last week from $237 to less than $100 means that the Dread Pirate Roberts was likely forced to pay out much of the extra gains Silk Road made from Bitcoin’s rise, most of his sellers were protected from those price changes and continued to trade their drugs for Bitcoins despite the currency’s plummeting value. Is that a good assumption that most sellers would have taken this protection? Given how Bitcoin was rising I would have thought at least some would have taken the gamble (and lost), but no idea how many.
  - eof 13y ago
    I think many were taking the gamble. What ended up happening is that a bunch of vendors who did not take the hedging canceled the orders. Since hedging doesn't protect buyers, the buyers just get their original btc back; this made a lot of people upset and their are multiple threads on reddit and the silk road forums calling out these vendors who essentially cheated the escrow/hedging system. I wonder if it will have an effect with buyers demanding hedging as well.
    - dmix 13y ago
      > I think many were taking the gamble The article says many didn't take the gamble: > As a result, only about 1,000 sales listings out of more than 11,000 were taken off the site during the crash, according to DPR. “Those were from vendors who didn’t protect themselves,” he (or she) says. “The volatility only hurts vendors who don’t hedge their escrow balance.”
      - corin_ 13y ago
        Did the 10,000 take the protection, or did some of them gamble, but chose to honour they sales (and/or had already shipped product with funds still in escrow before the price dropped)?
    - makomk 13y ago
      I think the seller using hedging does insulate buyers from changes in the Bitcoin price if they get refunded. If Silk Road didn't do things that way, it'd be possible for a malicious colluding buyer and seller to profit from Bitcoin's instability at the expense of the Silk Road's operator. There were a lot of complaints on the Silk Road forums about cancelled orders though, and sellers saying they took a loss in order not to cancel.
  - TheAnimus 13y ago
    Well he might not have made a loss, depending on the size of the premium he has taken. Also if the market is liquid enough and he has the right kind of trades he might even be able to automatically delta hedge. Or even more simply, he just immediately de-bitcoins it, then re-bitcoins it when releasing the funds from escrow. This is probably the most likely.
    - mike_esspe 13y ago
      If he is doing automatic hedges, then it's relatively easy to uncover his identity with access to main BTC exchanges?
      - TheAnimus 13y ago
        Depends, I doubt enough of the information about what is going to be hedged is public, and I'd imagine he takes a view on BTC to help stay anonymous too. (Ie delays certain operations) It would also be trivial to have choice of exchanges and settlement currencies. I don't know enough about silk road, having only read about it never played with it, but I'm guessing you can't see the time a merchant has placed an offer to the time they chose the hedging. Combined with the low overall spend, and ever increasing liquidity of BTC, I would have thought that would be quite a challenge. It is funny with BTC, I was playing with some exchanges the other day and there did appear to be free money to be had as not only some Bid Offer spreads were above or below other exchanges, there was some free cash to be had fixing the FX market, say selling in USD to buy in EUR with a hedge on a regular forex site. I figure its still pennies in front of bulldozers time mind, but the thing is its not a perfect market. As such hiding in it whilst making reasonable profits should be easy if you charge enough premium for the option.
corin_ 13y ago
“If I spend $100 on drugs now and the price of [Bitcoin] doubles in a week, then I’ve effectively spent $200 on those drugs by next week.” Even if you're buying drugs with hard cash on a street corner, the fact remains that you would probably be financially better off by investing that money rather than trading it for drugs - hell, you could buy some Bitcoins with it as your (somewhat risky) investment if you so wish! From the same person: "Addicts. People who need their drugs and will pay for them, despite knowing that they could buy twice as much for the same money in a week." I don't get why he is ignoring the fact that Bitcoin could also halve in value in a week's time (errr, like it just has!), or why Forbes are quoting someone who seems to think that investing in Bitcoin is guaranteed to make you money. Or why that person is a user on Silk Road if he thinks that every week he doesn't spend on there he can double his money.
- hugbox 13y ago
  "the fact remains that you would probably be finanically better of by investing that money rather than trading it for drugs..." No shit? Truly you are one of the great minds of our times.
  - corin_ 13y ago
    The fact that it is obvious was exactly my point and the reason I was dismissive of that part of the article, so not only have you missed what I was commenting about, you've also acted like a bit of a dick in doing so. Not really necessary.
    - drewblaisdell 13y ago
      Yes, but no one (here or in the article) was trying to make the point that buying drugs is a good investment.
      - corin_ 13y ago
        No, but he (in the article) was trying to make the argument that it is better financially to not by drugs because of Bitcoin rising in value, my point was that this is generally true regardless of whether Bitcoin is involved.
mrb 13y ago
It is ridiculous to talk about the Bitcoin "bust" when it is still trading at $60-70 which was the all-time high as of March 20, a mere 4 weeks ago ?! "Bust" means "a complete failure". Bitcoin, so far, is an incredible success. Let's not let the temporary bubble of the past week blind us from the big picture. Edit: the only failure are the buyers who lost money because they failed to realize it was stupidly dangerous to buy during a price bubble.
- corin_ 13y ago
  I bought a few Bitcoins a while back when they were something like $5-$10 and thought I was an idiot for buying during a bubble then (but only bought a few to play with, not as a way of making money - the fact that I forgot about them until a few days ago was just a happy coincidence). Sure right now it looks like you were stupid if you bought them a week ago, but if you bought them when they were at $150 and sold at $250 then who's the idiot?
  - eurleif 13y ago
    > if you bought them when they were at $150 and sold at $250 then who's the idiot? If you buy a lottery ticket and win then who's the idiot? You.
    - corin_ 13y ago
      There's a difference between blind luck and speculation. Of course your point is still debatable, but between the guy who looked at that $150 and said "no way it's about to burst" and the guy who said "this is going to keep going up" (for the record that wasn't/isn't me), how do you settle who's the idiot and who's the genius?
      - dmix 13y ago
        > how do you settle who's the idiot and who's the genius By those who analyze historical trends and make rational future projections, such as this person (who is the latter): https://scottlocklin.wordpress.com/2013/04/17/btc-bubbles/ https://scottlocklin.wordpress.com/2013/04/17/btc-bubbles/ The former disregards the odds of winning in a lottery or the signs that a bubble exists and could pop at any moment.
a_bonobo 13y ago
I'd like to speculate that the name of the founder(s) is a small hint towards them being US-Americans: The Dread Pirate Roberts is a fictional character from The Princess Bride (book and movie), who in the novel turns out to be not one person, but a title given from one retiring pirate to the next successor because it's easier to work as a pirate when everybody is scared of you. In this case, it's a fun way to hint that Silk Road is not operated by a single person, but by a group from what I think are US-Americans. There I merely speculate: I think the movie was a success in the US but not much in any other country. In fact, the only people who've quoted the movie to me are US-Americans. Can people from other countries weigh in on this? Would non-Americans choose this as a pseudonym?
- samegreatsleeve 13y ago
  The Princess Bride is extremely popular among 20-40 year olds in the Anglosphere. Australia, Canada, USA, UK. This narrows down your search for the Dread Pirate Roberts to like 150 million people. So the fact that this English speaking Silk Road founder is from the English speaking world and was probably a child or teenager in the 80s is not really narrowing it down much.
  - a_bonobo 13y ago
    150 million people out of 7.079 billion possible candidates? In my view that is narrowing it down a lot!
    - leoedin 13y ago
      It does narrow it down, but not to any useful level. For all intents and purposes, trying to pick someone from a pool of 150 million vs 7 billion is essentially the same level of impossible.
      - daeken 13y ago
        Really interesting article on using information theory to narrow down suspects of crime: http://www.gwern.net/Death%20Note%20Anonymity http://www.gwern.net/Death%20Note%20Anonymity

77 points by Lightning 13y ago

To insulate those sellers against Bitcoin fluctuations, the eBay-like drug site also offers a hedging service. Sales are held in escrow until buyers receive their orders via mail, and vendors are given the choice to turn on a setting that pegs the escrow’s value to the dollar, with Silk Road itself covering any losses or taking any gains from Bitcoin’s swings in value that occur while the drugs are in transit. I was wondering exactly how vendors could have withstood a > 50% loss of value while their Bitcoins were in escrow. Silk Road is a remarkable service and provides an experience that will keep the value of Bitcoin alive at some level for a long time.

corin_ 13y ago
So while Bitcoin’s crash last week from $237 to less than $100 means that the Dread Pirate Roberts was likely forced to pay out much of the extra gains Silk Road made from Bitcoin’s rise, most of his sellers were protected from those price changes and continued to trade their drugs for Bitcoins despite the currency’s plummeting value. Is that a good assumption that most sellers would have taken this protection? Given how Bitcoin was rising I would have thought at least some would have taken the gamble (and lost), but no idea how many.
- eof 13y ago
  I think many were taking the gamble. What ended up happening is that a bunch of vendors who did not take the hedging canceled the orders. Since hedging doesn't protect buyers, the buyers just get their original btc back; this made a lot of people upset and their are multiple threads on reddit and the silk road forums calling out these vendors who essentially cheated the escrow/hedging system. I wonder if it will have an effect with buyers demanding hedging as well.
  - dmix 13y ago
    > I think many were taking the gamble The article says many didn't take the gamble: > As a result, only about 1,000 sales listings out of more than 11,000 were taken off the site during the crash, according to DPR. “Those were from vendors who didn’t protect themselves,” he (or she) says. “The volatility only hurts vendors who don’t hedge their escrow balance.”
    - corin_ 13y ago
      Did the 10,000 take the protection, or did some of them gamble, but chose to honour they sales (and/or had already shipped product with funds still in escrow before the price dropped)?
  - makomk 13y ago
    I think the seller using hedging does insulate buyers from changes in the Bitcoin price if they get refunded. If Silk Road didn't do things that way, it'd be possible for a malicious colluding buyer and seller to profit from Bitcoin's instability at the expense of the Silk Road's operator. There were a lot of complaints on the Silk Road forums about cancelled orders though, and sellers saying they took a loss in order not to cancel.
- TheAnimus 13y ago
  Well he might not have made a loss, depending on the size of the premium he has taken. Also if the market is liquid enough and he has the right kind of trades he might even be able to automatically delta hedge. Or even more simply, he just immediately de-bitcoins it, then re-bitcoins it when releasing the funds from escrow. This is probably the most likely.
  - mike_esspe 13y ago
    If he is doing automatic hedges, then it's relatively easy to uncover his identity with access to main BTC exchanges?
    - TheAnimus 13y ago
      Depends, I doubt enough of the information about what is going to be hedged is public, and I'd imagine he takes a view on BTC to help stay anonymous too. (Ie delays certain operations) It would also be trivial to have choice of exchanges and settlement currencies. I don't know enough about silk road, having only read about it never played with it, but I'm guessing you can't see the time a merchant has placed an offer to the time they chose the hedging. Combined with the low overall spend, and ever increasing liquidity of BTC, I would have thought that would be quite a challenge. It is funny with BTC, I was playing with some exchanges the other day and there did appear to be free money to be had as not only some Bid Offer spreads were above or below other exchanges, there was some free cash to be had fixing the FX market, say selling in USD to buy in EUR with a hedge on a regular forex site. I figure its still pennies in front of bulldozers time mind, but the thing is its not a perfect market. As such hiding in it whilst making reasonable profits should be easy if you charge enough premium for the option.

corin_ 13y ago

“If I spend $100 on drugs now and the price of [Bitcoin] doubles in a week, then I’ve effectively spent $200 on those drugs by next week.” Even if you're buying drugs with hard cash on a street corner, the fact remains that you would probably be financially better off by investing that money rather than trading it for drugs - hell, you could buy some Bitcoins with it as your (somewhat risky) investment if you so wish! From the same person: "Addicts. People who need their drugs and will pay for them, despite knowing that they could buy twice as much for the same money in a week." I don't get why he is ignoring the fact that Bitcoin could also halve in value in a week's time (errr, like it just has!), or why Forbes are quoting someone who seems to think that investing in Bitcoin is guaranteed to make you money. Or why that person is a user on Silk Road if he thinks that every week he doesn't spend on there he can double his money.

hugbox 13y ago
"the fact remains that you would probably be finanically better of by investing that money rather than trading it for drugs..." No shit? Truly you are one of the great minds of our times.
- corin_ 13y ago
  The fact that it is obvious was exactly my point and the reason I was dismissive of that part of the article, so not only have you missed what I was commenting about, you've also acted like a bit of a dick in doing so. Not really necessary.
  - drewblaisdell 13y ago
    Yes, but no one (here or in the article) was trying to make the point that buying drugs is a good investment.
    - corin_ 13y ago
      No, but he (in the article) was trying to make the argument that it is better financially to not by drugs because of Bitcoin rising in value, my point was that this is generally true regardless of whether Bitcoin is involved.

mrb 13y ago

It is ridiculous to talk about the Bitcoin "bust" when it is still trading at $60-70 which was the all-time high as of March 20, a mere 4 weeks ago ?! "Bust" means "a complete failure". Bitcoin, so far, is an incredible success. Let's not let the temporary bubble of the past week blind us from the big picture. Edit: the only failure are the buyers who lost money because they failed to realize it was stupidly dangerous to buy during a price bubble.

corin_ 13y ago
I bought a few Bitcoins a while back when they were something like $5-$10 and thought I was an idiot for buying during a bubble then (but only bought a few to play with, not as a way of making money - the fact that I forgot about them until a few days ago was just a happy coincidence). Sure right now it looks like you were stupid if you bought them a week ago, but if you bought them when they were at $150 and sold at $250 then who's the idiot?
- eurleif 13y ago
  > if you bought them when they were at $150 and sold at $250 then who's the idiot? If you buy a lottery ticket and win then who's the idiot? You.
  - corin_ 13y ago
    There's a difference between blind luck and speculation. Of course your point is still debatable, but between the guy who looked at that $150 and said "no way it's about to burst" and the guy who said "this is going to keep going up" (for the record that wasn't/isn't me), how do you settle who's the idiot and who's the genius?
    - dmix 13y ago
      > how do you settle who's the idiot and who's the genius By those who analyze historical trends and make rational future projections, such as this person (who is the latter): https://scottlocklin.wordpress.com/2013/04/17/btc-bubbles/ https://scottlocklin.wordpress.com/2013/04/17/btc-bubbles/ The former disregards the odds of winning in a lottery or the signs that a bubble exists and could pop at any moment.

a_bonobo 13y ago

I'd like to speculate that the name of the founder(s) is a small hint towards them being US-Americans: The Dread Pirate Roberts is a fictional character from The Princess Bride (book and movie), who in the novel turns out to be not one person, but a title given from one retiring pirate to the next successor because it's easier to work as a pirate when everybody is scared of you. In this case, it's a fun way to hint that Silk Road is not operated by a single person, but by a group from what I think are US-Americans. There I merely speculate: I think the movie was a success in the US but not much in any other country. In fact, the only people who've quoted the movie to me are US-Americans. Can people from other countries weigh in on this? Would non-Americans choose this as a pseudonym?

samegreatsleeve 13y ago
The Princess Bride is extremely popular among 20-40 year olds in the Anglosphere. Australia, Canada, USA, UK. This narrows down your search for the Dread Pirate Roberts to like 150 million people. So the fact that this English speaking Silk Road founder is from the English speaking world and was probably a child or teenager in the 80s is not really narrowing it down much.
- a_bonobo 13y ago
  150 million people out of 7.079 billion possible candidates? In my view that is narrowing it down a lot!
  - leoedin 13y ago
    It does narrow it down, but not to any useful level. For all intents and purposes, trying to pick someone from a pool of 150 million vs 7 billion is essentially the same level of impossible.
    - daeken 13y ago
      Really interesting article on using information theory to narrow down suspects of crime: http://www.gwern.net/Death%20Note%20Anonymity http://www.gwern.net/Death%20Note%20Anonymity