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About this $1.2 billion crap…

I owe much of this post to the work of Nicolas Christin, the researcher who previously provided the analysis of Silk Road’s income. He is much cleverer than me or you. Give him a follow on @nc2y

One of the most dramatic revelations to come out of the New York Criminal Complaint in relation to Ross Ulbricht, the alleged Dread Pirate Roberts, was that Silk Road had enjoyed a turnover of $1.2 billion since its inception 2½ years ago, which equated to a commission of $80 million for its owner.

This is how we have been reporting the FBI's claims
This is how we have been reporting the FBI’s claims

Actually, that’s not exactly what the document said. What it said was:

The total revenue generated from these sales was 9,519,664 Bitcoins, and the total commissions collected by Silk Road from the sales amounted to 614,305 Bitcoins. These figures are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates, although the value of Bitcoins has fluctuated greatly during the time period at issue.

Indeed they have “fluctuated greatly”.  In fact, from $0.67 to $214.67 at Mt.Gox exchange rates. In the early days, Bitcoin and Silk Road were totally interdependent. Bitcoin relied on Silk Road for its early rise in value and Silk Road needed Bitcoin for anonymous trading.  The fact Bitcoin dipped then bounced back after the Silk Road seizure suggests this is no longer the case.

Anyway, I digress.  The rate at the time of calculation was around $126.

So despite the FBI admitting it did the laziest thing ever – multiplied the total number of Bitcoins by the current exchange rate – these figures were breathlessly repeated by journos around the world as fact.  And I will readily admit I also used them. I’m probably even more guilty because I knew they weren’t accurate. In my defence, though, I didn’t think they were that far off. I knew that in the early days the exchange rate was below $1, but also there were few sales back then. I thought it might have been balanced out a bit by the number of sales that occurred during the Bitcoin bubble around Easter this year when it hit the high of near $215. Of course, with hindsight, I realise how erroneous this maths was (duh, when it was $215, something that previously cost BTC215  now cost BTC1). This is why I really should stick to words.

So if the $1.2 billion/$80 million is incorrect, what is a more realistic figure? I’m going to try to dumb down this explanation so that even I would understand it.

There is no reason to doubt the FBI’s estimate of about 9.5 million Bitcoins in revenue over the lifespan of the marketplace.  And there is no doubt that Silk Road has enjoyed exponential growth. But let’s say (for ease of maths sake) that a gram of MDMA is worth $50 and that hasn’t changed over the past couple of years.  If you bought a gram of MDMA back in February 2011, when Bitcoin reached parity, it would cost you 50 Bitcoins.  If you bought the same gram a couple of years later when the Bitcoin was at $100, it would cost you 0.5 of a Bitcoin.  So a total of $100 has actually been spent (2 grams) and a total of 50.5 Bitcoin has been spent.  In this instance, the FBI has valued the 50.5 Bitcoin at around $6,363.  That’s quite different to $100.

Of course, there were only a few sales per day going through the site in February 2011 and thousands a couple of years later. So the overall difference is not going to be as wide a gap as the single example given above.

Christin provided me with his best guesstimate of the real value of total revenue, but did not want to go public with it until he had a better chance to test his figures. Suffice to say, though, whilst a not insignificant turnover, it was likely to be far, far less than the $1.2bn estimate.

The same logic can also be applied to the commission estimate insofar as earnings are concerned, but if the commission has been retained as Bitcoin, then the $80 million figure is sort of fair, because there would be 614,305 Bitcoin sitting in an account that could be valued at today’s rate. Of course, actually trying to cash out that amount of Bitcoin would cause the rate the plummet. So even the $80 million is not a real figure.

That is assuming, of course, that the commissions of the past two and a half years are still sitting in Bitcoin wallets and haven’t been cashed out into some offshore accounts and business enterprises. Which would be kind of astounding

But then, there’s little that would surprise me about this case at this point.

What do you think? Is the $80mil floating around, or has DPR been cashing out, readying for retirement?

17 Responses

    1. It’s not only the trouble with anonymity – that is such a large percentage of total Bitcoin, any attempt to move it would cause the price to plummet. So I don’t really think it is realisable value.

      That said, I’ve certainly proved myself to be no mathematician or economist so I wouldn’t be surprised to be taken to task on this 😀

  1. > What do you think? Is the $80mil floating around, or has DPR been cashing out, readying for retirement?

    Floating around. For example, there’s that address with the 111k btc from the first year, which is still just sitting there without being touched since November 2011. The indictment date indicate DPR only bothered withdrawing every hundred or two hundred days, so he was not thinking much about it. The testimony from everyone is that he was not spending large sums on anything visible.

    Between that and the growth of SR, I very roughly estimate he still has something like 500k btc. See

    (The interesting consequence here is that of his $80m fortune, almost all of it comes not from actually making money on SR, but making money in the form of Bitcoins which he then held and benefitted from it increasing in value by an order of magnitude or three.)

      1. Is it? It doesn’t seem that likely to me – has Satoshi *ever* moved more than trivial quantities of bitcoins, much less 111k btc? Actually, one can probably check this by seeing how distant it is from the original mined bitcoins: if it is Satoshi, it should be no more than one or two transactions away from the mining, but if it was SR it should be several many transactions (they have to be mined, tranferred into SR, tumbed, and withdrawn to the address).

  2. Cashing out. Investing in startups. Rolling stone gathers no moss…This was a great distill job of the facts and much appreciated. Reading blog after blog, it becomes obnoxiously repetitive and redundant. You did the grunt work contacting the researcher – 5 stars, 2 thumbs up. Raised the bar, needed it.

  3. Excellent as ever, Eileen.

    I ran across a seller I’d interviewed before, who’d held onto most of his bitcoins (he’s on benefits, didn’t want cash in his bank account). He only recently cashed out – sold all his bitcoins for about £300,000. My guess is there are a few hundred sellers who became millionaires off the recent $1000 BTC moment.

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