In a newly published paper (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645) on the use of bitcoin for illegal activity, researchers from the University of Sydney, the University of Technology Sydney and the Stockholm School of Economics in Riga indicate that a quarter of all bitcoin users are associated with illegal activity.
The use of bitcoin for illicit purposes has long been the most controversial aspect of the cryptoasset, although it has taken a back seat to speculation around the bitcoin price over the past few years.In addition to estimating the scale of illegal activity involving bitcoin, the research paper also claims this sort of activity accounts for a significant portion of bitcoin’s intrinsic, underlying value.MethodologyIn the paper, which was co-authored by Sean Foley, Jonathon R. Karlsen and Tālis J. Putniņš, publicly available information is used as the basis to identify an initial sample of users involved in illegal activity on the Bitcoin blockchain. Seizures of bitcoin by law enforcement, hot wallets of darknet markets, and Bitcoin addresses on darknet forums are used here, in addition to the trade networks of users who were identified in this data set.Additionally, the researchers use a formula of their own creation to detect users likely to be involved in illegal activity by analyzing the entire public blockchain up until the end of April 2017. The formula for detecting criminals on the blockchain involves a wide variety of metrics such as transaction count, transaction size, frequency of transactions, number of counterparties, the number of darknet markets active at the time, the extent the user goes to conceal their activity and the degree of interest in bitcoin in terms of Google searches at the time.“Bitcoin users that are involved in illegal activity differ from other users in several characteristics,” the paper says. “Differences in transactional characteristics are generally consistent with the notion that while illegal users predominantly (or solely) use bitcoin as a payment system to facilitate trade in illegal goods/services, some legal users treat bitcoin as an investment or speculative asset. Specifically, illegal users tend to transact more, but in smaller transactions. They are also more likely to repeatedly transact with a given counterparty. Despite transacting more, illegal users tend to hold less bitcoin, consistent with them facing risks of having bitcoin holdings seized by authorities.”The paper also notes that bitcoin transactions between illegal users are three to four times denser, meaning those users are much more connected to each other through their transactions. This is consistent, the paper says, with illegal users taking advantage of bitcoin’s use as a medium of exchange, while legal users tend to view the cryptoasset as a store of value.The Scale of Illegal Activity on the Bitcoin NetworkAs with any research into the activities of criminals on the internet, it’s important to take the findings of this study with a grain of salt. Remember, this is a study on the activities of those who do not wish their activities to be discovered in the first place.For example, another study Bitcoin Magazine reported on last week indicated a much lower level of illegal activity — albeit limited to the concept of bitcoin laundering — on the Bitcoin network than what was found in the study being reported on today.Having said that, here are the levels of illegal activity on the Bitcoin network, according to the study:24 million illicit users, which is 25 percent of all users
36 million illicit transactions per year, which is 44 percent of all transactions
$72 billion worth of illicit transactions per year, which is 20 percent of the dollar-value of all transactions
$8 billion in illicit bitcoin holdings at the time of the study
51 percent of all bitcoin holdings throughout bitcoin’s history have been illegal in nature
The study compares Bitcoin’s black market to the markets for illegal drugs in the United States and Europe. In the United States, this market is worth $100 bill
The use of bitcoin for illicit purposes has long been the most controversial aspect of the cryptoasset, although it has taken a back seat to speculation around the bitcoin price over the past few years.In addition to estimating the scale of illegal activity involving bitcoin, the research paper also claims this sort of activity accounts for a significant portion of bitcoin’s intrinsic, underlying value.MethodologyIn the paper, which was co-authored by Sean Foley, Jonathon R. Karlsen and Tālis J. Putniņš, publicly available information is used as the basis to identify an initial sample of users involved in illegal activity on the Bitcoin blockchain. Seizures of bitcoin by law enforcement, hot wallets of darknet markets, and Bitcoin addresses on darknet forums are used here, in addition to the trade networks of users who were identified in this data set.Additionally, the researchers use a formula of their own creation to detect users likely to be involved in illegal activity by analyzing the entire public blockchain up until the end of April 2017. The formula for detecting criminals on the blockchain involves a wide variety of metrics such as transaction count, transaction size, frequency of transactions, number of counterparties, the number of darknet markets active at the time, the extent the user goes to conceal their activity and the degree of interest in bitcoin in terms of Google searches at the time.“Bitcoin users that are involved in illegal activity differ from other users in several characteristics,” the paper says. “Differences in transactional characteristics are generally consistent with the notion that while illegal users predominantly (or solely) use bitcoin as a payment system to facilitate trade in illegal goods/services, some legal users treat bitcoin as an investment or speculative asset. Specifically, illegal users tend to transact more, but in smaller transactions. They are also more likely to repeatedly transact with a given counterparty. Despite transacting more, illegal users tend to hold less bitcoin, consistent with them facing risks of having bitcoin holdings seized by authorities.”The paper also notes that bitcoin transactions between illegal users are three to four times denser, meaning those users are much more connected to each other through their transactions. This is consistent, the paper says, with illegal users taking advantage of bitcoin’s use as a medium of exchange, while legal users tend to view the cryptoasset as a store of value.The Scale of Illegal Activity on the Bitcoin NetworkAs with any research into the activities of criminals on the internet, it’s important to take the findings of this study with a grain of salt. Remember, this is a study on the activities of those who do not wish their activities to be discovered in the first place.For example, another study Bitcoin Magazine reported on last week indicated a much lower level of illegal activity — albeit limited to the concept of bitcoin laundering — on the Bitcoin network than what was found in the study being reported on today.Having said that, here are the levels of illegal activity on the Bitcoin network, according to the study:24 million illicit users, which is 25 percent of all users
36 million illicit transactions per year, which is 44 percent of all transactions
$72 billion worth of illicit transactions per year, which is 20 percent of the dollar-value of all transactions
$8 billion in illicit bitcoin holdings at the time of the study
51 percent of all bitcoin holdings throughout bitcoin’s history have been illegal in nature
The study compares Bitcoin’s black market to the markets for illegal drugs in the United States and Europe. In the United States, this market is worth $100 bill