Measuring the Intangible: The Dark Web, Bitcoin, and The Quantity Theory of Money

Abstract

With no central bank, and a seemingly anonymous peer-to-peer network, Bitcoin has become the solution of choice for those wishing to operate in illegal markets hidden within the Dark Web. Sales of contraband are at an all-time high online and the exact size and severity of the problem can only be roughly approximated. This is a result of both the sophisticated encryption of the Dark Web and the secrecy of payment systems, like Bitcoin. In an effort to precisely size these illicit markets, I will use the quantity theory of money applied to Bitcoin as an initial framework. This application of QTM has been used before to understand Bitcoin behavior, but until now, velocity was estimated using a linear, indirect and general measurement. In this paper, the direct and precise measurement of Bitcoin velocity is calculated. This is done so by using a recursive algorithm that uses branch logic through the public Bitcoin transaction ledger to estimate specific transfer rates in a given time frame with very specific sample sizing. From here, the quantity theory of money is applied to Bitcoin in order to confirm price targets, market capitalization, and circulation. Through several calculated assumptions, the total amount of Bitcoin in circulation in relation to the Dark Web illegal markets is estimated. This results in a tangible, USD-converted measurement for previously imprecise measurements. The participation-adjusted Bitcoin velocity is 6.4 for the first quarter of 2019 and the illegal Dark Web markets are valued at $61.8 billion as of April 2019 with Bitcoin at $4,000.