Over the past two years, I’ve collected and analyzed data from nearly 300 Bitcoin users to estimate the size of the Bitcoin economy – how much stuff, legal and illegal, people have bought with Bitcoin. The FBI estimate is that Silk Road was a massive billion dollar black market. Yet, all of the data I have collected, along with research by security expert Nicholas Christin, points to a market a tiny fraction of the size.

Forbes reported that “[g]iven the current price — $140/Bitcoin — that’s $1.2 billion in sales and $80 million in commissions[1].” This is not just bad economics – it is bad math. Of course, the price of Bitcoins has fluctuated from less than a dollar to a high of $300 U.S. over the past two years. Silk Road transactions from even a year ago would have taken hundreds of times more Bitcoin for the same street value of drugs.

The first price spike in 2011 and ensuing fervor for the virtual currency left me with a huge unanswered question. Are people actually buying with Bitcoin? Or is the whole Bitcoin market driven by recurrent manias? I needed to know what users were buying, so I surveyed them directly about spending habits, and combined the results with estimates for the number of active Bitcoin users.

When I first surveyed Bitcoin users in March 2012, the average user reported purchasing around $1,600 U.S. of goods and services. I surveyed users on Bitcoin Talk Forums – Ulbrich’s account there led in part to his arrest – and the Reddit subforum dedicated to Bitcoin[2]. The users on these forums are the most ardent supporters of Bitcoin, so I would suspect that the average spending per user was on the high side compared to everyone who has ever purchased Bitcoin. Based on 18,000 users actively buying things with Bitcoin (I based the number of active users on the number of reported active accounts from the largest Bitcoin exchange MtGox), I figured Bitcoin users paid for just under $29 million U.S. in goods and services from March 2011 to March 2012.

My survey also revealed that 62 percent of users made purchases to hide their identity. Assuming that all of these users purchased exclusively on Silk Road, the trade on Silk Road from March 2011 to March 2012 was about $17.9 million. Despite the crude, back-of-the-envelope calculation, security expert and Carnegie Mellon computer engineering professor, Nicolas Cristin – who directly accessed the site and counted transactions – found a similar market of $14.4 million[3]. My estimate was probably a little high because the 62 percent of users who used Bitcoin to hide their identity likely bought both legal and illegal goods and services from a variety of sites that accept Bitcoin.

Was there an astounding increase in sales on Silk Road over the next year that can even remotely explain the FBI’s $1.2 billion figure? Absolutely not. I repeated a modified version of the survey in March 2013 on the same online forums. I had over double the response rate, and I asked more in-depth questions to get a better grasp of what users were actually buying. For March 2012 to March 2013, I estimated that the total Bitcoin economy had more than doubled in size to $63 million U.S. and might have been as high as an impressive $119 million U.S. No other economy on earth can claim a 100 to 300 percent growth rate. Still, this pales in comparison to the FBI claim of a $1.2 billion underground economy.

In fact, I was surprised to find that users reported buying relatively more legal goods and services. In 2013, only 31 percent of users reported that they used Bitcoin to hide their identity, half the share of the year before. I suspect that the growth in legitimate places to spend Bitcoin offered users other venues to spend their virtual currency. Over the past year, a number major websites, including WordPress, Reddit, and 4chan, have started to accept Bitcoin, and a number of storefronts selling everything from computer parts to DVDs to books to kitchenware have made it easier to shop with the virtual currency. Using the same crude method as before to calculate the size of Silk Road, I would peg the annual Silk Road black market around $20 to $40 million. In a July interview, Nicholas Christin said that Silk Road revenues of “[s]omewhere between $30 million and $45 million a year would not surprise me[4]”. Again, his expectation is well within the range of my findings.

Both Nicholas Christin and I have corroborating evidence that the total revenues for Silk Road in the past two years were in the range of $35 million to $65 million U.S. I should say that gathering data on the Bitcoin and Silkroad market is imperfect, because, by design, Bitcoin and Silk Road hide as much information about users and transactions as possible. Furthermore, the users I surveyed were probably less likely to admit buying illegal goods because of the risk. Yet, Nicholas Christin and I, using entirely different methods, both found similar market sizes over the two year period the FBI was monitoring Silk Road. I doubt that we simultaneously underestimated the market by a factor of 40.

To support my efforts to increase knowledge about the Bitcoin market for goods and services, user sentiment, etc, please make donations to 1EySGJWKjN5U4gQwkvPjNApKxL1KwpCZ9L

[1] http://www.forbes.com/sites/kashmirhill/2013/10/04/fbi-silk-road-bitcoin-seizure/ [2] I collected results anonymously, so I have no way to know if Ulbritch participated in my survey. [3] His initial estimate in a draft paper was $22 million, slightly above mine. [4] http://www.dailydot.com/business/silk-road-monthly-sales-black-market-drugs-study/