Almost half of all bitcoin transactions are associated with illegal activity, a new study has concluded.
Researchers have also linked a quarter of bitcoin users with crime, such as hacks, money laundering and the trading of drugs and illegal pornography.
Worryingly for investors, they believe that the sheer popularity of the cryptocurrency amongst criminals is a major contributor to its value.
If criminals turn their backs on bitcoin and start embracing more privacy-focused digital currencies, its value is “likely” to fall, the researchers say.
The study, which was conducted by researchers from the University of Sydney and the University of Technology Sydney, found that 44 per cent of bitcoin transactions and 25 per cent of all users were associated with illegal activity.
Their findings from April 2017, the most recent part of the research sample, suggested that around 24 million bitcoin market participants use the cryptocurrency “primarily for illegal purposes”.
These bitcoin users are estimated to conduct around 36 million transactions per year, with a total value of around $72 billion, and collectively hold around $8 billion worth of bitcoin, the researchers say.
One of the main reasons bitcoin is so popular with criminals is that the cryptocurrency allows users to conceal their identities.
However, it isn’t completely anonymous, as every transaction is recorded on a public ledger called the blockchain. What’s more, the researchers say it is possible to use this information to identify specific individuals.
“The techniques developed in this paper can be used in cryptocurrency surveillance in a number of ways, including monitoring trends in illegal activity, its response to regulatory interventions, and how its characteristics change through time,” the study reads.
“The methods can also be used to identify key bitcoin users (e.g., ‘hubs’ in the illegal trade network) which, when combined with other sources of information, can be linked to specific individuals.”
The researchers say they used high-profile bitcoin seizures – including an FBI raid on the Silk Road Dark Web marketplace – as a starting point for their analysis, and managed to use the blockchain to reconstruct a network of transactions between market participants from there.
“Although individual identities are masked by the pseudo-anonymity of a 26-35 character alpha-numeric address, the public nature of the blockchain allows us to link bitcoin transactions to individual ‘users’ (market participants) and then further identify the users that had bitcoin seized by authorities,” they wrote.
That’s potentially extremely worrying for bitcoin-using criminals, who the researchers say are now looking at alternative cryptocurrencies that are better at concealing a user’s activity, such as Dash, Monero or ZCash.
“We find that the emergence of such alternative cryptocurrencies is also associated with a decrease in the proportion of illegal activity in bitcoin,” the study reads.
However, they also believe that bitcoin could become less useful and less valuable if criminals turn away from it.
“Our paper suggests that a significant component of the intrinsic value of bitcoin as a payment system derives from its use in facilitating illegal trade,” they wrote.
“This has ethical implications for those that view bitcoin as an investment, as well as valuation implications.
“For example, changes in the demand to use bitcoin in illegal trade (e.g., due to law enforcement crackdowns or increased adoption of more opaque cryptocurrencies in illegal trade) are likely to impact its fundamental value.”
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