Bitcoin ups and downs unraveling Silk Road?

The deep web black market site Silk Road is known for two things: as a place to buy drugs and other illegal products, and for being an early adopter of bitcoin.

However, the site appears to have experienced some unusual troubles recently and some analysts are tying Silk Road's problems directly to bitcoin.

Silk Road suffered a lengthy outage in the last 24 hours, apparently due to a denial of service (DDoS) attack. The site has resumed service, but there's speculation that hackers attack places like Silk Road because of the connection to bitcoin (some bitcoin exchanges, notably the largest, Mt. Gox, have also been forced to deal with DDoS attacks).

Willard Foxton, the Telegraph's "skulduggery" reporter, wrote earlier today that one of his "sleazier" contacts emailed him to report that Silk Road had collapsed. Foxton adds the site was inaccessible by Tor browser when he tried to take a look for himself.

The larger issue for Silk Road and other vendors accepting bitcoin is the digital currency’s volatility. Bitcoin’s price jumped to around $250 earlier this year before plunging to around $60. It has since recovered to well above $100 and was trading around $130 Wednesday morning.

But the price movements cause both hyperinflation and hyperdeflation. When bitcoin prices surge nobody wants to buy, and when prices fall nobody wants to sell. So the volatility means that no one wants to use bitcoins for transactions -- better to just hang on and see what happens.

That’s a real problem for Silk Road and others transacting in bitcoin. Who wants to use bitcoin to buy a product when tomorrow that same bitcoin could be worth a lot more (or a lot less)?

There is some good news: the bitcoin price has been relatively stable for the last couple of weeks. Stability will help people feel more comfortable using bitcoins to buy and sell, rather than speculating on the price movement. In addition, more vendors are signing on to use bitcoins, increasing the size of the market, which will also help to encourage the use of bitcoins in everyday transactions.