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Bitcoin Prices Recover After Sliding on Silk Road Bust

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Oct. 3 (Bloomberg) -- The price of Bitcoins recovered after the virtual currency lost a third of its value, triggered by the arrest of the operator of an online marketplace for drugs and illicit goods.

One unit of the digital money was trading for about $117 on the Bitstamp Ltd. exchange as of 7:30 p.m. in New York. Bitcoin touched a low of $85 yesterday after charges against Ross William Ulbricht, who runs the “Silk Road Hidden Website,” were unsealed. He was charged in federal court in New York for running a “sprawling black-market bazaar” where anonymous users bought and sold illegal drugs and phony identification documents using Bitcoins. Before that, they were worth around $127 on the market.

The virtual currency exists as software that’s designed to be untraceable, making it an attractive tender for those seeking to trade anonymously via the Web. While yesterday’s plunge in value was probably due to speculation that demand for the digital money will shrink after the U.S. government seized the Silk Road website, the rebound indicates that there’s still plenty of demand for Bitcoins outside Silk Road, according to Richard Bove, vice president of equity research at Rafferty Capital Markets LLC.

“That’s the most fascinating thing with Bitcoin: You can sit there and list 150 things that are wrong with it, but it meets a need,” Bove said in an interview. “If you are an Argentinian with high rate of inflation, you need Bitcoins. If you are worried about the sequester and the shutdown of the government, you might need it. They are meeting a need for a large number of people somewhere.”

Meeting Demand

Since being introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoin has become popular way to pay for goods and services on the Internet, with 11.8 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks the digital currency’s activity.

New Bitcoins can only be created by solving complex problems embedded in the currency, which requires greater computing power as more of the money is “minted.” Since that limits the number of Bitcoins, their value will be propped up, Bove said.

“I think over time, the direction will be up,” he said. “It defies all logic, but for many users, it works.”

While Bitcoins are designed to be untraceable, that’s not always guaranteed since most transactions leave a record of the exchange. Although the currency can be used for illicit goods, it’s also becoming a popular way to buy and sell legitimate products and services, from cupcakes to Web hosting.

Growing Use

Bitstamp and several other online exchanges have emerged where Bitcoin holders are able to trade the digital currency for dollars, euros and other legal tender. With the growing use of Bitcoins, driven in part by speculative demand, the currency is up about tenfold over the last year, according to Bitcoincharts.

Still, there’s uncertainty over the currency’s future as regulators and law enforcement agencies look at its uses. U.S. prosecutors said yesterday that Ulbricht, known on Silk Road as “Dread Pirate Roberts,” ran the site as “the most sophisticated and extensive criminal marketplace on the Internet” from January 2011 to September 2013. The site generated sales of about $1.2 billion and about $80 million in commissions for Silk Road, they said.

Ulbricht, 29, was charged with narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. He tried to have one user killed for attempting to extort money from the site, prosecutors said in a criminal complaint unsealed in Manhattan federal court.

Ulbricht appeared in federal court in San Francisco yesterday, according to Julie Bolcer, a spokeswoman for Manhattan U.S. Attorney Preet Bharara.

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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