Will Silk Road crackdown prove to be the best thing ever to happen to Bitcoin?

When the FBI shut down Silk Road, an online marketplace favoured by drug dealers, analysts predicted it would spell the end of Bitcoin—an unregulated digital currency created by complex computer algorithms that trades anonymously online—which largely funded the site’s activities.

According to the FBI, Silk Road had processed 9.5 million Bitcoins in two years, an amount equivalent to more than 80 per cent of all Bitcoins now in circulation. Within hours of its demise, the price of a Bitcoin plunged from $140 to $109.

But as the shock of Silk Road’s closure wore off, Bitcoin fans began suggesting that the crackdown might prove to be the best thing ever to happen to the currency.

“If the only value of Bitcoin was to buy drugs anonymously on Silk Road, then the price of Bitcoin would now be zero,” says Jerry Brito, a senior research fellow at George Mason University.

Instead, Bitcoin’s price had bounced back by Monday, to $139.

One of the benefits of the shutdown, says Greg Schvey of the research firm the Genesis Block, is that it answered the lingering question of just how much of the market for Bitcoins was driven by illegal activities. Schvey estimates that Silk Road revenue of 9.5 million Bitcoins ($1.2 billion) actually represents a mere four per cent of the total 225 million Bitcoin transactions in the past two years. While Silk Road may have been important to establishing a market for Bitcoin in the early days, he says, “what we’ve seen is the trend has been very much toward legitimate use.” Bitpay, a Bitcoin payment processor backed by PayPal founder Peter Thiel, processed $65 million worth of legal transactions in August alone.

The biggest boost to Bitcoin’s credibility from the Silk Road crackdown, Brito says, is that it proves the digital currency doesn’t actually exist outside the long arm of the law. It’s only a matter of time before new sites such as Silk Road emerge. But with the strongest link between Bitcoin and the criminal universe shut down for now, he says it’s up to government regulators to decide what to do next. “Do we make sure that legal businesses can build a legitimate infrastructure around Bitcoin? Or do we want to feed it to the Silk Roads of the world?”