Is bitcoin the “currency of criminals”? Numbers tell the tale.

8 June 2017

Last week you made this article one of the most popular of my career, currently topping 2,600 Likes. It rebuts a video where Greg Leffler makes some questionable statements about bitcoin.

The statement of his that’s garnered the most discussion is that bitcoin is the “currency of criminals”. A lot of the comments basically came down to “yes it is!” “no it isn’t”, with no supporting evidence. My article offered a little, but I admit it was weak. (I dismissed the illicit markets’ volume while pointing to numbers that imply high volume for legal bitcoin use.)

What’s needed, as usual, are numbers.

Specifically:

  1. What percentage of bitcoin is used for illegal activity (vs. legal activity)?
  2. At what percentage threshhold do we say that a currency is a “currency of criminals”?

How criminal is bitcoin?

To compute the first answer you first need to know total bitcoin volume. You’d think that it’s easy to figure this out, as all transactions are recorded on the blockchain, a worldwide ledger that’s essentially unchangeable and universal. But then you run into a problem of definition: Do you count bitcoins that are exchanged for dollars (or vice-versa)? That’s a big part of bitcoin’s transaction volume — bigger, I think, than for any other currency. (This feature lends support to arguments that bitcoin is an asset, not a currency. For this discussion, though, let’s consider it as a currency.)

Then you have to know the volume for illegal activity. That’s hard to do for any currency, as people generally try to hide their lawbreaking. Mr. Leffler lists as hotbeds of bitcoin criminality: malware ransoms; drugs; fake I.D.s; and assassinations. We have some figures for malware ransoms paid in bitcoin (as, again, those payments are visible on the blockchain): About $1 billion in 2016 according to one report.

Besides malware, we have to know the size of the bitcoin “dark market” for drugs, fake I.D.s, and assassinations. As far as I know, nobody’s made reliable, recent calculations for these. So our debates are just us throwing invisible rocks at each other. I believe that these numbers are relatively small, and welcome evidence to the contrary.

How does bitcoin compare to the dollar, euro, bhat?

Finally, it’s time to answer the second question: What is the percentage threshhold to make something a “currency of criminals”? Well, this whole discussion is really comparing bitcoin to dollars (et al.), so let’s start there. One 2012 estimate puts the “underground economy” of the U.S. at around 12.5%. In other countries, the shadow economy comprised over 50% of total economic activity in the early 2000s.

Calculating the answer

Even without complete information, we can now apply these numbers to bitcoin. With malware at $1billion/year, let’s say that the illegal “dark market” measures up at another $1billion/year. (This is admittedly my own guess: You can change the numbers according to your own guess.) $2billion is 12.5% of $16billion. $2billion is also 50% of $4billion.

So by these assumptions: If bitcoin’s legitimate use is over $16billion/year, the U.S. dollar is more of a “currency of criminals”. If bitcoin’s legitimate use is over $4billion, it’s typical of other world currencies.

Only if legitimate bitcoin volume is under $4billion/year can it be considered more “criminal” in use than (for example) the Thai bhat.

What are the real figures? Is bitcoin the “currency of criminals”? Numbers will tell: I welcome your evidence in the comments.

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I’m the author/presenter of the LinkedIn Learning/Lynda.com course “Learning Bitcoin“. One video from that course is shown above.

I’ve written a few other things related to bitcoin, and a whole lot about technology and such. I’m currently producing a documentary about efforts to model the human brain in computers, “Almost a Brain“.)

Originally published at https://www.linkedin.com/pulse/bitcoin-currency-criminals-numbers-tell-tale-tom-geller

Commentary, Cryptocurrency, Math