What is bitcoin used for?
Thursday 30 June 2016
A new report suggests the chief application for bitcoin is currently online gambling.
Bitcoin has always had a murky past. It first came to proper mainstream attention thanks to the efforts of one Ross Ulbricht, who adopted it as his currency of choice for his online emporium of magical substances, known as the Silk Road. Ulbricht built bitcoin into his drug marketplace because it was ideally suited to the job: it could be used anonymously, and transactions were both speedy and irreversible (avoiding the problems of merchants being hit with chargebacks and being forced to put in support calls to PayPal - an insult no drug dealer should be forced to endure).
In fact, it seems possible that such illicit use is in bitcoin’s DNA: a recent article by Andrew O’Hagan exploring Craig Wright’s connections with the virtual currency notes early links between Wright, his partner Dave Kleiman, and Ulbricht. There’s a suggestion that Kleiman may have helped create not only bitcoin but the drugstore that was its first major application. ‘Matthews told me about a meeting at the Bondi Iceberg Club in Sydney that Wright had with Ross Ulbricht, the founder of Silk Road, now serving two life sentences. Silk Road used bitcoin to trade all kinds of contraband items because the transactions could be made anonymously. Wright later confirmed that this meeting took place, but said only that Ulbricht was full of himself and they didn’t discuss bitcoin. Matthews seemed to think this was unlikely. He wondered whether Kleiman had had more to do with Ulbricht; other sources suggested the same.’
Today, bitcoin is still used to buy illegal drugs online, but the volume of transactions is small. It was never really that large; back in 2013, a report suggested that around 0.5% of bitcoin transactions were used to buy drugs. The estimate was that some $50 million per year in bitcoin was being spent on drugs. That’s a relative drop in the ocean; as the article concludes, ‘Wikipedia claims that the illegal drug trade constitutes 1% of world GDP. Bitcoin seems to underindex to other payment mechanisms for buying drugs.’ Remember, too, that this was before the Silk Road was taken down, and at least one other popular online drug marketplace collapsed.
Gambling is bitcoin's biggest current real-world application
But bitcoin hasn’t yet broken free from its libertarian and shadowy past. It turns out that some 50-60% of bitcoin transactions are now made in the context of gambling.
The reasons are obvious. Just like the Silk Road, these sites need to keep a low profile from regulators and law enforcers, since most of them operate illegally. Their owners don’t want to deal with chargebacks, and their customers need a degree of anonymity. The nature of bitcoin means deposits and payouts can be made almost immediately and essentially for nothing, compared to the time taken to make an international transfer and the costs involved. Literally billions of dollars are bet in these sites. That’s not bad for an industry only four years old: one of the first and most popular gambling sites, SatoshiDice.com, was founded in 2012. Then there’s the well-known poker site SealsWithClubs.eu, which uses bitcoin, as well as countless other smaller sites.
This is really just a result of bitcoin’s innate properties - a symptom of the fact it can be used quickly, quietly, cheaply and conveniently. The same properties drive its use as a currency for anonymous donations, particularly to organisations like Wikileaks and others that individuals may not want to draw attention to through their bank statements. A smaller-scale (and probably non-representative) survey shows what anecdotal evidence also suggests - that another major use case for bitcoin is purchasing computer hardware and hosting services. And, of course, there’s remittance, which essentially purchasing work for bitcoin. In this era of crowdfunded crypto platforms, the exchange of development and marketing labour for BTC is becoming increasingly common. Ethereum, Lisk, DigixDAO, Waves - together these alone total tens of millions of dollars of bitcoin payments.
Lastly, there’s speculation, with a significant proportion of bitcoin holders engaging in trading for profit (or otherwise, if they’re one of the 80% of day traders who supposedly come out on the wrong side of an exchange). Though unless you know exactly what you’re doing, this probably counts as another form of gambling. Or possibly even giving, for the truly inept...
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