highlights from digital gold

“I try to remind myself that Bitcoin will probably collapse,” he said. “As bullish as I am on it, I try to check myself and remind myself that new innovative things usually fail. Just as a sanity check.”
But he kept going, and not just because of the money that had piled up in his bank account. It was also because of the new money that he and the other men in Lake Tahoe were helping to bring into existence—a new kind of money that he believed would change the world.
The technical details of how all this worked could be mind-numbingly complicated—involving advanced math and cryptography. But from its earliest days, a small group of dedicated followers saw that at its base, Bitcoin was, very simply, a new way of creating, holding, and sending money.
Given that it aimed to challenge some of the most powerful institutions in our society, the Bitcoin network was, from early on, described by its followers in utopian terms.
The degree to which Bitcoin spoke to its followers was apparent from the variety of people who left their old lives behind to chase the promise of this technology—aficionados
“I think when they dig up our society, all Planet of Apes–style, in a couple of centuries, Bitcoin is probably going to have had a greater impact on the world than Urban Outfitters. We’re still in early days.”
The Chinese Wal-Mart executive, for instance, had grown up with grandparents who escaped the communist revolution with only the wealth they had stored in gold. Bitcoin seemed to him like a much more easily transportable alternative in an uncertain world.
This, then, is not a normal startup story, about a lone genius molding the world in his image and making gobs of money. It is, instead, a tale of a group invention that tapped into many of the prevailing currents of our time: the anger at the government and Wall Street; the battles between Silicon Valley and the financial industry; and the hopes we have placed in technology to save us from our own human frailty, as well as the fear that the power of technology can generate.
Satoshi promised a kind of cash that wouldn’t need a bank or any other third party to manage it. It was a system that could live entirely in the collective computing memory of the people who used it.
Hal had spent most of his professional life working on programs that allowed people to elude the ever-watchful gaze of the government.
When Hal returned to his computer in the evening, he immediately saw that it had made him 50 Bitcoins, now recorded next to one of his Bitcoin addresses and also recorded on the public ledger that kept track of all Bitcoins. These, the seventy-eighth block of coins generated, were among the first 4,000 Bitcoins to make it into the real world.
HAL FINNEY HAD long been preoccupied by how, in look and texture, the future would be different from the present.
But there was constant discussion of how the creeping digitization of life also gave governments and companies more command over perhaps the most valuable and dangerous commodity in the information age: information.
Encryption technologies had historically been a privilege largely reserved for only the most powerful institutions.
Hal was introduced to the potential of public-key cryptography in 1991 by the pathbreaking cryptographer David Chaum, who had been experimenting with ways to use public-key cryptography to protect individual privacy.
The government categorized encryption technology, such as PGP, as weapon-grade munitions, and this designation made it illegal to export. While the case was eventually dropped, Hal had to lie low with his own involvement in PGP for years and could never take credit for some of his important contributions to the project.
But Chaum’s effort would rub Hal and others the wrong way. With DigiCash, a central organization, namely Chaum’s company, needed to confirm every digital signature. This meant that a certain degree of trust needed to be placed in that central organization not to tinker with balances or go out of business.
During the 1990s Hal would calculate the maximum bill for his tax bracket and send in a check for that amount, so as to avoid the hassle of actually filling out a return.
Instead of being motivated by self-interest, his work seemed driven by an intellectual curiosity that bubbled over in each e-mail he wrote, and by his sense of what he thought other people deserved.
Until the Civil War, a majority of the money in circulation in the United States was issued by private banks, creating a crazy patchwork of competing bills that could become worth nothing if the issuing bank went down.
The search for a better form of money has always been about finding a more trustworthy and uniform way of valuing the things around us—a single metric that allows a reliable comparison between the value of a block of wood, an hour of carpentry work, and a painting of a forest.
Good money has generally been durable (imagine a dollar bill printed on tissue paper), portable (imagine a quarter that weighed twenty pounds), divisible (imagine if we had only hundred-dollar bills and no coins), uniform (imagine if all dollar bills looked different), and scarce (imagine bills that could be copied by anyone).
The essential quality of successful money, through time, was not who issued it—or even how portable or durable it was—but rather the number of people willing to use it.
With hashcash, computers essentially had to figure out which two numbers can be multiplied together to get 10,366,613, though the problems for hashcash were significantly harder than that. So hard, in fact, that all a computer could do was try out lots of different guesses with the aim of eventually finding the right answer. When a computer found the right answer, it would earn hashcash.
A computer had to perform lots of work to create each new unit of hashcash, earning the process the name “proof-of-work”—something that would later be a central innovation underpinning Bitcoin.
But the experiments that the Cypherpunks were doing in the real world continued to hit practical hurdles. No one could figure out a way to create money without relying on a central institution that was vulnerable to failure or government oversight. The experiments also suffered from a more fundamental difficulty, which was the issue of getting people to use and value these new digital tokens.
The nine-page PDF attached to the e-mail made it clear that Satoshi was deeply versed in all the previous efforts to create a self-sustaining digital money. Satoshi’s paper cited Back and Wei Dai, as well as several obscure journals of cryptography. But Satoshi put all these earlier innovations together to create a system that was quite unlike anything that had come before it.
this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain.
People who joined the Bitcoin network were, quite literally, both customers and owners of both the bank and the mint.
As his computer kept working at full capacity, trying to generate new coins, he began to worry about the carbon dioxide emissions caused by all the computers racing to mint coins.
Satoshi led off by talking about problems with traditional, or fiat, currencies, a term for money generated by government decree, or fiat.
“The root problem with conventional currency is all the trust that’s required to make it work,” Satoshi wrote. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
Most economists approve of the move away from the gold standard, as it allowed central banks to be more responsive to the ups and downs of the economy, putting more money into circulation when the economy grew or when people weren’t spending and the economy needed a jolt. But the policy has faced impassioned criticism, particularly from antigovernment circles, where many believe that the end of the gold standard allowed central banks to print money with no restraint, hurting the long-term value of the dollar and allowing for unbridled government spending.
With a hard cap on the number of Bitcoins, users could reasonably believe that Bitcoins would become harder to get over time and thus would go up in value.
The Internet had allowed a teenage Martti to discover and explore political ideas that were far from the Finnish social democratic consensus.
While Satoshi never discussed anything personal in these e-mails, he would banter with Martti about little things. In one e-mail, Satoshi pointed to a recent exchange on the Bitcoin e-mail list in which a user referred to Bitcoin as a “cryptocurrency,” referring to the cryptographic functions that made it run. “Maybe it’s a word we should use when describing Bitcoin. Do you like it?” Satoshi asked. “It sounds good,” Martti replied. “A peer to peer cryptocurrency could be the slogan.”
In the very first recorded transaction of Bitcoin for United States dollars, Martti sent NewLibertyStandard 5,050 Bitcoins to use for seeding the new exchange. In return, Martti got $5.02 by PayPal.
This trade raised the obvious question of how much a Bitcoin should be worth. Given that no one had ever bought or sold one, NewLibertyStandard came up with his own method for determining its value—the rough cost of electricity needed to generate a coin, calculated using NewLibertyStandard’s own electricity bill.
Indeed, despite the recent innovations, at various points during late 2009 and early 2010 it appeared that the amount of computing power on the network was shrinking.
In May a potential new user wrote to the Bitcoin mailing list, inquiring about how to accept Bitcoin for his web-hosting business. Sometime later he wrote again: “Wow, not one response in months. Amazing.”
Laszlo quickly figured out how to route the mining process through his computer’s GPU. Laszlo’s CPU had been winning, at most, one block of 50 Bitcoins each day, of the approximately 140 blocks that were released daily. Once Laszlo got his GPU card hooked in he began winning one or two blocks an hour, and occasionally more. On May 17 he won twenty-eight blocks; these wins gave him fourteen hundred new coins that day.
Bitcoin’s consensus model, which demanded that any new additions to the blockchain—and any changes to the Bitcoin software—had to be approved by a majority of the computers or nodes on the network, ensured that even if people tried to change the rules, or screw up the blockchain, they could not succeed without support from 50 percent of the other computers on the network. This model did leave the network vulnerable if one person or group captured more than 50 percent of the computing power, in what was referred to as a 51 percent attack.
For Gavin, one of the primary attractions of this technology was the conceptual elegance of the decentralized network and the open source software, which was updated and maintained by all of its users instead of one author.
These arguments were, to some degree, technological analogues of the political arguments that libertarians made for taking power away from central governments: political power worked better when it was in the hands of lots of people rather than a single political authority.
To start participating in the Bitcoin project, Gavin quickly began e-mailing with Satoshi to suggest his own improvements to the code and, in short order, became the first person other than Satoshi or Martti to officially make a change to the Bitcoin code.
He and MiSoon discussed possible names for the site. He mentioned an old domain name that he owned and was not using—mtgox.com. Jed had bought the site in 2007, for use as an online exchange to buy and sell the cards used in the role-playing game Magic: The Gathering—hence the acronym for Magic: The Gathering Online Exchange.
But within the first week he had his first hundred-dollar day of trading, and by the end of the month Mt. Gox had overtaken Martti’s service and the other existing exchange in trading volume to become the largest Bitcoin business around.
That ArtForz had not taken advantage of the bug himself was a minor miracle. But it was also what the incentives in the Bitcoin system were designed to encourage. ArtForz had been mining coins himself—using the GPU technology that Laszlo had first pioneered—and he knew that if confidence in the system was undercut his coins would be worthless. The market incentives were working as they were supposed to work.
Since then, he’d had a peripatetic lifestyle, looking for a place where he could feel at home.
Jed and Mark were outwardly very different people. Mark was a large, awkward Frenchman, while Jed was a slight, suave American. But both of them were loners who tended to skeptically watch the world from afar and live mostly in their own heads.
Ross’s ability to get Silk Road up and running was a product of his sheer desperation at a difficult moment in his life.
Over the next three days, Roger’s purchases dominated the markets and helped push the price of a single coin up nearly 75 percent, from $1.89 to $3.30.
Until very recently, Bitcoin had been kept alive almost entirely by computer programmers who played around with the Bitcoin software themselves. Now it was attracting a new breed of participant, like Roger Ver, who could not understand the code, but for whom the political possibilities behind Bitcoin were enough of a draw.
The growth of the black market was something many of the old Cypherpunks had wanted to enable by creating an anonymous currency—in the 1990s some of the Cypherpunks had even talked about a “Digital Silk Road.” But now that it was actually here, it was causing much more mixed feelings in the Bitcoin community.
Much of the tension in the broader Bitcoin community seemed to be a result of the deluge of curiosity seekers and pranksters, who overwhelmed the chat channel with inane commentary. In June, over 15,000 new people joined the forums, more than doubling the membership and leading to 152,000 new postings.
These moves were enough to stem the run on Mt. Gox, but immense damage had already been done. Hackers had enjoyed nearly an hour to do their work, while confused and terrified Bitcoin users looked on. Starting at around 2:15 in the morning in Japan, the hackers had begun selling large quantities of Bitcoins, pushing the price down dramatically.
After Mark had shut everything down, he sat in his dark apartment and began to piece together what had happened. The user logs showed that someone had signed in with the administrator account of Jed McCaleb, the Mt. Gox founder who was still helping Mark out. The computer appeared to be in Hong Kong, but it was likely the hacker was porting in to a computer there from elsewhere. The Mt. Gox software enabled the hacker to change the balances in accounts and he created over 100,000 new Bitcoins out of thin air and put them in a new Mt. Gox account. These were not real coins on the official blockchain; they existed only in Mark’s accounting system. But that was enough for the hacker to begin using them on the Mt. Gox exchange.
Jesse and Roger grew concerned that all Mt. Gox’s technological and financial affairs were in the hands of one person, with no one else in a position to question his decisions or stand ready if things went wrong.
In July, the founder of a small Polish Bitcoin exchange, Bitomat, announced that he had accidentally deleted the files where he kept the private keys to the Bitcoin addresses at which his customers’ 17,000 Bitcoins were stored. The coins were still visible on the blockchain, but without the private keys, nothing could be done with the coins.
In late July coins started mysteriously disappearing from MyBitcoin wallets. The founder of the site, a man who called himself Tom Williams, was unresponsive and soon enough all the wallets were frozen. Customers realized that they had no idea who Tom Williams actually was.
For people like Gavin Andresen and Jeff Garzik, the problems at Mt. Gox and MyBitcoin were evidence for why a decentralized financial network like Bitcoin was needed. Both Mt. Gox and MyBitcoin were centralized companies and they failed because of the amount of power and money that had been placed in the hands of their operators.
Mike and the other Googlers were taking advantage of the company’s policy of allowing its employees to spend 20 percent of their working time on non-Google experiments. Mike used this time to develop BitcoinJ, a codebase that made it possible to work Bitcoin into websites.
The different communities where Bitcoin was winning support were not always in agreement about what kind of future they were working toward.
People may have trusted the code underlying Bitcoin, but they didn’t necessarily trust themselves to deal with that code in the right way—and so they turned to outside experts to secure their money and make it easily available.
Many libertarians and anarchists argued that the good in humans, or in the market, could do the job of regulators, ensuring that bad companies did not survive. But the Bitcoin experience suggested that the penalties meted out by the market are often imposed only after the bad deeds were done and do not serve as a deterrent. When it came down to it, in each case of big theft, Bitcoin users eventually went to government authorities to seek redress—the same authorities that Bitcoin had been designed, at least partly, to obviate. Mark Karpeles reported the Mt. Gox hack to the Japanese police and MyBitcoin users went to the FBI’s cybercrime unit.
The notion that a site dedicated to selling heroin and forged passports was a moral cause would seem to many in the outside world an exceedingly bold claim. But for Ross, Silk Road was an application of the ideas advanced by the philosophers and economists whom Roger Ver and Erik Voorhees also loved—the ones who prized freedom above all else.
This feedback loop created a remarkably engaged online community in which pot and heroin highs were discussed with the same level of analytical detail that Consumer Reports brought to its toaster reviews.
There was, however, an often unspoken irony in the success of Silk Road, and of Bitcoin for that matter. The site and the currency, which aimed to circumvent the power of the government, were largely built on technology that had been created by the government or through research sponsored by tax money. The Internet itself was an outgrowth of several government research programs, and the Tor network that served as a backbone of Silk Road had been created by the Office of Naval Intelligence. Bitcoin, meanwhile, relied on advances in cryptography that had been built thanks to government funding. Ross himself had gained the expertise to build his government-eluding site after attending one of the best-funded public high schools in Texas and two public universities. It was no coincidence that these technologies did not emerge from a place with a weak government and bad educational systems.
The task force was given the name Marco Polo in deference to the man who explored the original Silk Road and all the new wonders it contained.
Japan was the only place Roger had encountered where people’s response, when he described Bitcoin, was to call it scary—rather than interesting or silly.
These Casascius coins would later become the most widely used image of Bitcoins when news organizations needed a picture of something to accompany stories about the virtual currency.
The idealists who had been driving the Bitcoin world often got caught up in what they wanted the world to look like, rather than figuring out how to provide the world with something it would want.
A normal bank payment took several days, and a wire transfer moved faster but cost $30 to $50 each time.
Charlie’s practical bent had led him, unwittingly, to an issue that had rarely been a part of the Cypherpunk discussions but that was perhaps the most widely acknowledged problem with the existing financial system: the creakiness of the old payments system.
The Automated Clearing House, or ACH, which facilitated payments between bank accounts, was created in the 1970s and had not changed much since; this helped explain why bank transfers took at least a day to go through.
The weakness of the existing system had been evident during the financial crisis when the Wall Street bank Morgan Stanley needed a $9 billion infusion from a Japanese firm. The agreement was reached on a Sunday, but the money could not be sent because the wire network was down for the weekend and the next day was Columbus Day. It turned out that even banks couldn’t send each other money on holidays. In order to get around this, the Japanese bank cut an absurd $9 billion paper check.
Roger was not excited about the Winklevoss twins. He thought that they were free riders, who had gotten rich thanks to the legal system, rather than by inventing something real.
This was an insular community in which even marrying a Jew from Europe or Turkey was considered intermarriage. Charlie was terrified that he would become a persona non grata in his neighborhood if he backed out of his deal.
By the time he visited the BitInstant offices, Wences had become a Bitcoin believer, and he was intent on spreading the idea among his powerful friends in Silicon Valley, a place that had so far largely ignored Bitcoin, but that would be vital if the technology was going to move into the mainstream.
“I think I understand economics better than most people because I grew up in Argentina,” he would say. “I’ve seen every single monetary experiment you can imagine. This is the street smart economics. Not the complex PhD economics.”
In 1984, during the first major episode of hyperinflation after the Argentinian military junta lost power, Wences’s mother came to get him and his two sisters from school. His mom was carrying two grocery bags filled with money—the salary she had just been given in cash. She rushed with Wences and his sisters to the grocery store and had them run through the aisles, grabbing as much food as possible before the hyperinflation caused the goods to be repriced. A man walked through the aisles all day doing nothing but repricing the items on the shelves to keep up with the rapidly changing value of the peso. When Wences and his mother got to the register, he and his sisters would run back and grab more food if they still had any money left. Holding on to money was equal to losing it.
In America, the dollar seamlessly serves the three functions of money: providing a medium of exchange, a unit for measuring the cost of goods, and an asset where value can be stored.
The book, by anthropologist David Graeber, argued that historians and economists have wrongly assumed that money grew out of barter. In fact, Graeber argued, and Wences came to believe, barter was never common and money was actually an evolution of credit—a way of tracking what people owed to each other. People used to just keep a mental tally of what they owed each other, but money provided a way to expand the system more broadly among people who didn’t know each other.
The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money.
As in many developing countries, it was incredibly hard to open a bank account and even harder to get a credit card. Despite having grown up in Argentina, Wences had never had an Argentinian bank account.
Rather than taking luxury vacations, Wences used his time off to go with his wife to Burning Man, and he had recently done a vision quest—involving days without any creature comforts—in the wilderness of the Andes with one of his best friends from his younger years in Argentina. But Wences had a good-natured self-confidence and a willingness to listen that had always allowed him to get along easily with hard-driving power players.
“You can call someone in Jakarta on Skype,” Wences told them. “You can see them and you can hear them and there’s a synchronous connection with a lot of bandwidth. There’s a ton of magic happening, which is incredible. And you hang up and you want to send them one cent and that’s not possible. That’s ridiculous. It should be a lot easier to send a cent than to see video and audio.”
Charlie and his team appeared to the twins like inexperienced entrepreneurs who didn’t know how to put business interests above social and political allegiances.
They had asked Charlie to continue buying them coins with the goal of owning 1 percent of all the Bitcoins in the world, or some $2 million worth at the time. This ambition underscored their commitment to sticking it out with Bitcoin.
Because there were so few viable Bitcoin companies around, Micky made the somewhat controversial decision to use his investors’ money to buy Bitcoins themselves.
Wences was getting more of a response from Fortress—a Wall Street giant managing nearly $60 billion—than he was from Silicon Valley venture-capital firms with just a few hundred million dollars.
Wences explained his back-of-the-envelope calculations of what Bitcoin might be worth if people began to realize its value as a substitute for gold. All the gold in the world was worth around $7 trillion. If Bitcoin became even half as popular, that would put the value of each Bitcoin at around half a million dollars—or about fourteen thousand times more than its $34 value that day in March.
To transfer the money into an Argentinian bank and then take it out in cash would eat about 10 percent of the money in bank and exchange fees—some $150,000—and would involve several days of waiting.
To prove how easy this all was, Wences asked Blodget to take out his phone and helped him create an empty Bitcoin wallet. Once it was up, and Wences had Blodget’s new Bitcoin address, Wences used the wallet on his own phone to send Blodget $250,000, or some 6,400 Bitcoins. The money was then passed to the phones of other people around the table once they had set up wallets. Anyone could have run off with Wences’s $250,000, but that wasn’t a risk with this particular crowd. Instead, as the money went around, Wences saw the guests’ laughter and wide-eyed amazement at what they were watching.
In three days, Wences had reached more powerful people than Bitcoin had in its previous four years of existence.
New York Attorney General Elliot Spitzer said PayPal was breaking the law by facilitating payments for gambling companies, and the Department of Justice decided PayPal was violating the USA Patriot Act. The new limits and restrictions imposed took it further and further from its ambitious original goals. Thiel and Levchin left PayPal soon afterward. This had scared much of Silicon Valley away from tinkering with finance, which was seen as largely resistant to new technology because of all the regulations.
But the PayPal experience also explained why there was a hunger for the idea of a virtual currency. There was a lingering memory of this unfulfilled dream of Silicon Valley. While the Internet had freed information and communication from the postal service and the publishing industry, the Internet had essentially never disrupted money, and dollars remained bound by the old networks run by the credit card companies and the banks.
Jed’s new company, named Ripple, was a cryptographic network that could be used to send any currency, not just Bitcoins. That made it less threatening to governments and banks and more attractive to people like Andreessen and Thiel, who both offered small seed investments.
If there was ever a time that Silicon Valley believed it could revive the long-deferred dream of reinventing money, this was it. A virtual currency that rose above national borders fitted right in with an industry that saw itself destined to change the face of everyday life.
If someone could build an ASIC designed specifically to solve the Bitcoin hash function, it would probably be able to crunch the numbers hundreds of time faster than a GPU and thus likely to win hundreds of times more Bitcoins.
Within hours, new Bitcoins were showing up in Jeff’s wallet, and within nine days the machine had earned back what Jeff had paid for it. The machine was eating up so much energy that it was heating up the room that it occupied.
Somewhat surprisingly, the operators of the biggest mining pools quickly agreed that they would revert to the old software, version 0.7. The operator of the prominent pool BTC Guild said that just switching his pool alone would get a majority of the computing power back on the earlier software. Doing this would mean losing the Bitcoins that had been mined since version 0.8 came out. But the losses would be much greater if the entire Bitcoin network lost the confidence of users.
Even the simple task of opening an account with Mt. Gox required a three-week wait for approval from Mark’s team.
This pointed to a broader issue with Charlie that was frustrating the Winklevoss twins and was clearly an outgrowth of his childhood desire for acceptance. Charlie loved telling people what they wanted to hear. He would always give the twins optimistic predictions for projects and would fail to alert them to impending problems until the last moment, in the hope that the problems would go away. This optimistic approach was great for a salesman, and Charlie had been a great salesman. But it was not such a great habit for a manager, who needed to find a way to deal with problems, not ignore them.
The community was hitting a roadblock that almost every movement striving to disrupt the status quo eventually reaches. The big ideals of Bitcoin had carried it a long way and were sound in theory, but eventually the community required some cooperation from the existing authorities—people needed the old banks to agree to move their money into the Bitcoin realm. This was like an anarchist commune that ran up against the unwillingness of local officials to continue delivering water and electricity. Such collisions with the recalcitrant real world are frequently where utopian schemes run into trouble.
With orders pouring in, Mt. Gox was so backed up it was taking half an hour for trades to go through. This exacerbated the price swings as people who thought they were buying at $160 weren’t getting their coins until the price was at $175.
It wasn’t apparent at the time, but these moves were part of the net tightening around Silk Road, as law enforcement agents in Baltimore narrowed in on their prey.
In the world of trading, though, the most valuable thing an exchange can offer is liquidity or, more simply, people buying and selling.
In 2012 and 2013 several big banks had faced $1 billion fines for not being vigilant enough in tracking money laundering.
Economists who had taken note of Bitcoin also pointed out that the virtual currency actually had built-in incentives discouraging people from using it. The cap on the number of Bitcoins that could ever be created—21 million—meant that the currency was expected to become more valuable over time. This situation, which is known as deflation, encouraged people to hold on to their Bitcoins rather than spend them.
But since the spring Ross had been dealing with continuing and varied attacks unlike anything he had experienced before. A hacker had managed to take the site down for days at a time and stopped only after Ross agreed to pay $100,000 up front and $50,000 every week thereafter—payments that ultimately amounted to $350,000.
His entry for the day FriendlyChemist was presumably killed, read: got word that blackmailer was excuted created file upload script started to fix problem with bond refunds over 3 months old
After this close call, Ross changed apartments, but he did not take the opportunity to cut and run. Instead, he stayed in San Francisco, watching his commissions from Silk Road pour in as the digital noose tightened around his neck.
At each point along the way, Bitcoin’s survival had required the strengths of a different subset of its believers.
When early Bitcoin users lost the private keys to their Bitcoin addresses, the coins associated with those addresses were lost forever. With a Coinbase wallet, on the other hand, if a customer lost the password, it was like losing the password to a normal website—the company could recover it.
At a time when Bitcoin’s popularity was faltering in the United States, the turnout in Argentina was many times greater than the thirty or so people who had attended the most recent meetups in New York and Silicon Valley.
The most prominent signs of this, during normal times, were the black market money changers—known as arbolitos—who were a regular presence in downtown Buenos Aires.
The spinning top that had been Ross Ulbricht’s life for much of the last three years was wobbling out of control in late September.
Bobby recognized that Chinese people would have little interest in the libertarian ideas of American Bitcoiners—decades of state-sponsored communism had killed most interest in ideologies.
Like Argentina, China had incredibly restrictive rules about moving money into and out of the country. But in China, unlike Argentina, these rules were not a response to runaway inflation, but instead part of the government’s effort to keep tight control over the exchange rate of the yuan, in order to promote the export economy.
Each Chinese citizen could move only the equivalent of $50,000 out of the country each year. As a result, it became difficult for wealthy people, including government officials, to get their riches out of China and into more secure foreign bank accounts.
Decades of communism had turned black markets into the norm.
Shortly thereafter, as a promotional tool, BTC China marked China National Day by removing the 0.3 percent commission that customers had to pay on every trade. In China, unlike anywhere else in the world, it was now essentially free to trade Bitcoin.
In response to questions from Senator Carper, the panelists pointed to all the activity in China and noted that if the United States came down too hard on Bitcoin, or pushed it out of the country, the innovation would be likely to move overseas to places like China where it would be harder to control.
THE UNMISTAKABLE IRONY of these wild days was that a technology that had been designed, in no small part, to circumvent government power was now becoming largely driven by and dependent on the attitudes of government officials.
Most of these hoteliers didn’t care about the ideas behind a decentralized currency; they were just happy to find a way around the expensive tollbooths that littered the Argentinian financial system. As an added bonus, they could end up with money in Bitcoins rather than the rapidly depreciating peso.
Mismanagement of currencies was a part of daily life in Argentina.
In China, scrupulously following the rules seemed to be a recipe for losing business.
Dimon knew what it was like to work in an industry that came under government supervision. Once Bitcoin came under similar regulation, it would require all the same fees and rules that bothered people in the traditional financial system.
Mark explained that the exchange had run up against a flaw in the Bitcoin protocol. The flaw, known as transaction malleability, allowed devious users to alter the codes that identified transactions in a way that made it impossible to tell if a transaction had gone through. Users in the know could request a withdrawal, change the code, and then request the same withdrawal again. Mark, in his statement, said this was not just a problem for Mt. Gox, but an issue with the Bitcoin software, which should have been fixed earlier.
Once he was back in his apartment with the QR codes—essentially complex bar codes—he began scanning in the private keys one at a time, with his computer’s webcam. A combination of fear and sickness slowly overtook him as each one of the wallets he scanned in showed up on his computer screen as empty.
Gonzague got right to the point and explained the staggering extent of the problem: some 650,000 Bitcoins—essentially all the company’s customer holdings—were gone, along with 100,000 coins that belonged to the exchange.
Still, under the apparently calm surface, there was immense and largely unseen damage. As the enormous figures from Mt. Gox suggested, tens of thousands of people had kept their money with the exchange despite all the warnings, and those holdings, estimated at over $400 million the week before, had now disappeared in a mysterious puff of smoke.
The man had been using Bitcoin to keep his retirement savings out of the unreliable peso—but now it was Bitcoin that failed him.
And yet, Bitcoin’s standing as a universal money, answerable to no government—and beyond the reach of any one government—had opened the way for companies like Mt. Gox, companies that took advantage of the fact that in the Bitcoin industry, each person could make up his own rules.
An Argentinian security expert, Sergio Lerner, had done a thorough study tracing the patterns of Satoshi’s mining during that time and concluded that he had captured well over a million Bitcoins, worth nearly $1 billion now. More impressive than that, though, was the security expert’s conclusion, from a careful analysis of the blockchain, that Satoshi had never spent a single one of the Bitcoins he had created. His work in creating the system really did seem to be a selfless act.
Most men in the room were wearing ties, but in true Silicon Valley style, Larsen and Silbert were not.
For many technology experts at banks, the most valuable potential use of the blockchain was not small payments but very large ones, which are responsible for the vast majority of the money moving between banks each day. In the stock trading business, for example, the lengthy settlement and clearing process means that the money and shares are all but frozen for three days. Given the sums involved, even the few days that the money is in transit carry significant costs and risks. As a result, various banks began looking at ways they could use the blockchain technology to make these sorts of large transfers quickly and securely.
Years earlier, Bitcoin had promised that it would spread its benefits to all its users, but by 2014 large chunks of the Bitcoin economy were owned by a few people who had been wealthy enough before Bitcoin came along to invest in this new system. Most of the new coins being released each day were collected by a few large mining syndicates. If this was the new world, it didn’t seem all that different from the old one—at least not yet.
He called the software that Satoshi had created a “hairball” containing lots of different things stuck together. As he saw it, the volunteer developers were still trying to untangle it. He was particularly focused on the limited number of transactions that were being confirmed and recorded on the blockchain with each new block. On average, there were only about four hundred transactions getting confirmed every ten minutes in mid-2014. If Bitcoin wanted to compete with payment networks like Visa, which processed two thousand transactions each second, the software was going to need to change significantly.
Each Bitcoin address has one and only one private key. The relationship between the private key and the address is determined by a series of complex math equations, which makes it essentially impossible to work backward from the public Bitcoin address to find the private key.
The length of the addresses and the sheer number of potential addresses ensure that it is all but impossible for the same address to be generated twice.
It is necessary for the computers on the network to verify every transaction because there is no central authority to do this work.
The computers taking part in the Bitcoin contest are looking for a block that can be put into a hash function known as SHA 256 and generate a sixty-four-character digest with a specific number of zeroes at the beginning.
The number of zeroes required to win the contest was somewhat inconsequential but made it easy to adjust the difficulty of the contest and ensure that new blocks arrived approximately every ten minutes.
The creative method for arriving at a single, communally agreed upon record of transactions provided a long-sought solution to a conundrum known as the Byzantine Generals Problem.