The atmosphere surrounding the bitcoin world has been in a whirlwind the past few days.

This has been because of general carelessness and what appears to be a comedy of errors that has landed the so-called “Dread Pirate Roberts” Ross Ulbricht in the slammer.

As the purported sole proprietor of the black market bazaar the Silk Road, Ulbricht has quite possibly stumbled upon one of the darkest uses of virtual currencies: people will use them to buy narcotics, weapons and other items of questionable merit.

This has quite possibly created a black cloud over the world of BTC. Trader sentiment has been clear: the disappearance of an illicit use for bitcoin like the Silk Road did indeed create a sell-off.

This particular incident is one that has not been seen since April, when a spectacular run-up in the price of bitcoin peaked with a major disruption in service for the currency’s largest exchange, Mt. Gox.

Based on Bitcoin Price Index data, the collective drop-back in April due to Mt. Gox’s discord caused a 70% decrease in price, from an all-time high of $230 on April 9 to $68.35 on April 16.

By comparison, the Silk Road’s shutdown resulted in a 20% drop, from what was a relatively stable closing price of $125.49 on October 1 to $99.81 on October 2.

The current price has trended back up, which suggests that the Mt. Gox shutdown was perhaps more chaotic than that of these most recent events.

While transaction volumes have long been volatile, so has the price of bitcoin over time as people are moving in and out of fiat currencies.

This is for a number of reasons, which recently has included miners pulling their bitcoins out of the market to continue to build out hardware infrastructure and cover their increasing operating margin.

What’s remarkable, however, is that even though the Silk Road shut down, transaction volumes have been on an uptrend. They did in fact drop in late September, as copycat black market operator Atlantis shut down. But the volumes appear to be at a relatively normal level.

While it’s dependent on an at-the-minute market price, the movement of 27,365 bitcoins on the block chain on October 4, likely from Ross Ulbricht's stash, nevertheless represents a substantial amount of holdings for the government.

In fact, conventional wisdom might suggest that with a governmental body owning so much of the currency it could create substantial market-maker powers within the bitcoin world.

Whether or not the feds wish to wield that power is irrelevant right now; seizure laws could restrict such immediate type of liquidation. However, the idea of a nation-state owning such a large denomination of a decentralized currency is quite possibly one of the reasons for such a huge sell-off.

What’s remarkable is that the price of bitcoin has gone back up a bit even with that market factor added in to the value of the price.

Perhaps an overwhelming convention used while writing about bitcoin in the mainstream media is the idea that the Silk Road somehow wielded market power over the value of BTC.

Or that people are going to be damaged in some way by the fact that they cannot make illegal transactions on the site anymore.

These past few days have repudiated that assertion, one that those who have long been legitimately involved in bitcoin should clearly know by now.

There are businesses doing well providing bitcoin-related services not dependent on the purchase of drugs.

Payment processor Coinbase, for example, has been transacting $15 million in payments since May when bitcoin prices were for the most part over $100. And startup exchange BitBox had processed a record $145,000 in volume before suspending operations to rebuild their system.

These two companies along with many others are doing legitimate business in the bitcoin economy everyday, the compliant way.

While it’s hard to predict what will happen with bitcoin prices over the long term, the resulting events of the Silk Road have suggested that there is already a large enough bitcoin economy to overcome this.

With prices being so high at this point, it is likely that even the average person can see that there is value in it as a protocol and payment method. Plus, it is always getting easier to obtain from companies that are adhering to regulatory compliance policies.

And the closure of the Silk Road suggests that such blatant illegal activity clearly irritated the feds from the start.

Even though Ulbricht seemingly thought his libertarian ideals would allow him to evade the authorities, he was wrong. “But no one is beyond the reach of the FBI. We will find you.”, one of the investigators told Forbes defiantly, displaying their attitude towards this degree of brashness.

What do you think about bitcoin prices in light of the Silk Road’s closure? Does this legitimize the currency or does it hurt it over time? What do you think about a government having possession of so many bitcoins? Let us know in the comments.

Featured image source: Flickr