Because so much bitcoin use is criminal - around $76 billion - if illegal users migrate to an alternative cryptocurrency, the value of bitcoin could decline, the study found. The declining value would presumably implicate bitcoin ETFs.
"A significant component of the intrinsic value of bitcoin as a payment system derives from its use in facilitating illegal trade. This has ethical implications for those that view bitcoin as an investment, as well as valuation implications. For example, changes in the demand to use bitcoin in illegal trade are likely to impact its fundamental value," it concluded.
The study, titled "Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies?", will be published in a forthcoming edition of the prestigious Review of Financial Studies.
To identify illegal bitcoin use, it used three methods.
The first took the escrow accounts through which known criminals - like the operators of the drug website Silk Road - had made bitcoin payments. Then, because of the nature of the blockchain, the authors could see everyone that made payments in and out of a known illegal user's escrow account.
The second involved scraping darknet chat forums in which illegal activity is discussed - things like drug and weapons deals. On these forums, bitcoin addresses are sometimes posted that are "almost certainly associated with illegal activity".
The third method involved pinging known darknet marketplaces that sells drugs, porn and weapons. After these addresses were pinged and known, the researchers could use the blockchain to figure out how many others were paying those exact addresses.
It then applied statistical models to the pool of known criminal users, to get a feel for the bitcoin market as a whole.
The conclusion: approximately one-fifth of the total dollar value of transactions and approximately one-half of bitcoin holdings "are associated with illegal activity".
Speaking to ETF Stream, Talis Putnins, a professor of finance at the University of Technology Sydney and one of the study's authors, said he was unsurprised that drug dealers made up such a large fraction of bitcoin's user base.
"It's clumsy to do transactions [in bitcoin], it's expensive to do transactions, there are waiting times, the fee itself, especially during peak periods, can be quite high. To buy a cup of coffee with bitcoin doesn't make sense at all.
"But to buy drugs, where otherwise the transaction costs would be high because either you're on the street risking your life or paying a premium to go through an expensive dealer... in drugs it makes sense because you're willing to stomach that inconvenience because the other methods of payments are more risky."
He added that he and his colleagues had already been contacted by law enforcement about using their methods to catch criminals.
The study is by no means the first to suggest that bitcoin is heavily used by criminals.
Professor Randall Wray, one of the world's foremost experts on the history of money, said: "Bitcoins will never become a significant part of the payments system. They are for speculators and drug dealers." Larry Fink, BlackRock's CEO, called bitcoin "an index of money laundering".
However these critics never provided any quantitative or peer-reviewed evidence for their assertions.
Some big names in the bitcoin market have also suggested there was some criminal use of bitcoin. For example, Tim Draper, one of the owners of the crypto exchange Coinbase, said that bitcoin was used by criminals. However he mixed this in with the claim that cash was used by criminals even more.
Prof Putnins noted that criminal use of bitcoin was declining as less transparent alternative cryptocurrencies came to market.
"As these other private cryptocurrencies come on board like Monero and Zcash there is some illegal activity that moves over there. The second effect is that when you get a bunch of mainstream hype going in bitcoin it dilutes down the proportion of activity that is illegal in bitcoin."