Bitcoin has really burst on the scene this year but the so-called currency still can't shake its shadowy past including connections to the criminal underworld.

Nearly half of all transactions in bitcoin are associated with buying and selling illegal goods and services including drugs, weapons and pirated software, according new analysis.

The study, which claims to use "groundbreaking forensic finance techniques" was conducted by Professor Talis Putnins and Jonathan Karlsen from University of Technology Sydney along with Dr Sean Foley from Sydney University, who tracked illegal bitcoin transactions worldwide using data from 2009 to 2017.

The FBI's billion dollar mistake

After downloading the entire bitcoin blockchain (the technology that underpins the currency and works like an immutable digital ledger of all transactions), the Sydney researchers collected samples of known criminal activity on the network.


To do this they relied on three sources. One was the seizure of darknet marketplaces from law enforcement agencies such as the seizure of the infamous Silk Road website created by Ross Ulbricht.

"What the FBI did was grab all the bitcoin that was in the escrow accounts and auctioned it off to the public. We can observe the auction of all those bitcoins and work backwards through the blockchain to find the actual escrow accounts and see all the users who had money sitting at Silk Road," Prof Putnins told

The researchers also used similar busts in Australia and Europe to identify users who frequently used Bitcoin for illegal transactions on similar sites.

From tracking known criminal uses of the currency, the researchers then used two further methods to help increase their sample of illegal activity, including that yet to be caught by authorities.

Scraping the dark web

"We systematically scraped from the darknet, all of the chat forums that are associated with drug websites," Prof Putnins said.

"And in those chat forums people are discussing deals that have gone bad and they often give the bitcoin addresses" because that's the only way to identify untrustworthy vendors.

"So we scraped all those addresses."

The third method the researchers used involved applying techniques from computer science to cluster together transactions into separate entities, or collections of bitcoin addresses, in the blockchain.


Basically, it allowed them to see anyone who had ever sent money to, or received money from, certain darknet market places.

These methods produced a sample of about 6 million bitcoin users and researchers then extrapolated from that by using techniques that analysed characteristics — things like average trade size, frequency, time at which they would trade and the number of trading counter parties.

"[We used] an econometric model that looks for users that are similar in characteristics to those that are known to be illegal, accounting for the fact that our sample is non random," Prof Putnins said.

"It really is developing new methods drawing on leading work in computer science, econometrics and network theory."

Their findings ultimately revealed that around one-third of bitcoin users are using the digital currency for illegal activity, with close to half of all bitcoin transactions facilitating illegal trade.

The resulting paper titled Sex, Drugs, and Bitcoin is currently undergoing a peer review process for a major financial journal that has been given in principle acceptance. Prof Putnins and his co-authors are expecting to travel to New York next year to defend the paper prior to publication.

Screen grabs from the dark web - weapons on The Armory. Photo / Supplied
Screen grabs from the dark web - weapons on The Armory. Photo / Supplied

Authorities to continue crack down

"The aim of our research is to help regulators understand the size of the task they face in attempting to monitor and regulate bitcoin, particularly as it becomes mainstream — for example listing on futures exchanges," Prof Putnins said.

He believes analysis like this is going to help them crack down on the nefarious side of cryptocurrency use.

"We've already been contacted by a few law enforcement agencies and they're interested in the methods that we've developed," he said. "They basically want a way to pin down individuals."

A difference among demand

As critics point out, the volatility of the cryptocurrency doesn't lend itself to being a particularly good form of exchange, at least not any time soon — a point Australia's Reserve Bank governor Dr Philip Lowe has been at pains to make.

"It seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions," he said this month.

While it has been adopted as a means of transaction in places like Venezuela where the local currency has collapsed, at least anecdotally, most people buying Bitcoin in developed economies are simply holding on to it in the hopes of continued capital gains.


"Users involved in illegal activity are very active in terms of buying, selling and trading, whereas legal users are largely buying and holding the cryptocurrency," Prof Putnins said.

While a more sophisticated crack down on cryptocurrencies like Bitcoin might dampen demand for the digital tokens, he hopes it will ensure that the tech which underpins the cryptocurrency is not tarred with the same brush.

"The blockchain technology that underpins Bitcoin holds significant promise for revolutionising many industries, but this sort of illegal activity risks stunting the adoption of this technology and limiting the potential benefits to society," he said.