Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money

by Nathaniel Popper

Each ingot of gold has always existed independent of every other ingot. Bitcoins, on the other hand, were designed to live within a cleverly constructed, decentralized network,

Bitcoin held out the promise of taking power from banks and governments and giving it to the people using the money.

“Privacy in an open society requires anonymous transaction systems,” he added.

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. Many countries at that time relied on circulating coins from other countries.

As sociologist Nigel Dodd put it, good money is “able to convert qualitative differences between things into quantitative differences that enable them to be exchanged.”

In their efforts to design a new currency, the Cypherpunks were mindful of the characteristics usually found in successful coinage. 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.

The word money comes from the Roman god Juno Moneta, in whose temple coins were minted. In the United States, the governors of the central bank, the Federal Reserve, who are tasked with overseeing the money supply, are treated like oracles of sorts; their pronouncements are scrutinized like the goat entrails of olden days. Fed officials are endowed with a level of power and independence given to almost no other government leaders, and the task of protecting the nation’s currency is entrusted to a specially created agency, the Secret Service, that was only later given the additional responsibility of protecting the life of the president.

The reward of new coins helped encourage Bitcoin users to set their computers to partake in the communal work of recording transactions.

People who joined the Bitcoin network were, quite literally, both customers and owners of both the bank and the mint.

He understood that everyone on the network was trying to win the computational race with the central processing unit, or CPU, in his or her computer. But the CPU was also running most of the computer’s other basic systems, so it was not particularly efficient at computing hash functions. The graphics processing unit, or GPU, on the other hand, was custom-designed to do the kind of repetitive problem solving necessary to process images and video—similar to what was needed to win the hash race function.

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. It had operated for just a few months

But Jesse and Roger had met when they were teenagers and both playing the card game Magic competitively. The strategy game appealed to both young men—and many of the other youngsters who later found Bitcoin—because they liked the idea of finding unexpected solutions to complex problems.

the distinction between the Bitcoin protocol and the current crop of Bitcoin companies.

neither Roger nor Erik was the type of anarchist-leaning libertarian who fought against authority figures and societal expectations of all kinds. Both men always looked presentable—usually clad in slacks and polo shirts—and generally approached conversation with a respectful and deferential tone.

But in the wake of the financial crisis and the Iraq War, these people and movements generally shared a desire to take power and resources back from society’s ruling institutions and return them to individuals. Both Occupy Wall Street and the Free State Project were ostensibly leaderless organizations that eschewed new power hierarchies.

Even the firmest advocates for Bitcoin’s self-empowering potential, like Roger Ver, were entrusting coins to Mt. Gox and MyBitcoin, rather than holding the coins in their own addresses. And they were paying the price in lost and stolen coins. This raised questions about whether people really wanted, or were capable of taking advantage of, the decentralization that Bitcoin was offering. 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.

collected in Bitcoins. 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. But Ross focused on the wrongs the government committed and ignored the advantages it had provided.

And in March the HSI bureau in Baltimore got approval from local prosecutors to form a task force, with other federal agencies, that would aim to burrow further into the cryptographically secured drug bazaar. 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.

Roger had always been a good salesman in part because of his ability to communicate his own conviction, but also because he had an intuitive sense for what people wanted and knew how to meet them at their level, without demanding agreement with his beliefs.

Just as Charles Schwab dealt with the New York Stock Exchange so that its customers didn’t have to do so, BitInstant handled all the dealings with Mt. Gox, making the process of acquiring Bitcoins faster and easier.

One particular incident had seared itself into Wences’s memory. 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.

Debt: The First 5,000 Years, a cult favorite in the Occupy Wall Street movement and in certain transgressive corners of Wall Street. 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.

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. And it was used as money because it did what all good money did: it served as a sort of physical ledger on which society could keep track of who was owed what. Each piece of gold represented a slot on the ledger of all outstanding gold, which anyone could verify by checking the mass and volume of the gold.

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.

Bitcoin fans argued that the United States dollar was not backed up by anything real either—dollars were just pieces of paper. But this argument ignored the fact that the United States government promised to always take dollars for tax bills, which was a real value no matter how much people disliked paying taxes.

Practically no one was promising to take Bitcoin for anything. The primary value the coins had at this point was the expectation that they would be worth more in the future, allowing current holders to cash out for more than they paid. To some cynics, that description made Bitcoin sound suspiciously like a less savory sort of financial invention: a Ponzi scheme.

first-ever Bitcoin exchange-traded fund, or ETF, which would hold Bitcoins and move with the value of the coins, but trade on a real stock exchange, much like the hugely popular gold ETF.

Ross’s transition from an affable youngster obsessed with oneness to a minor tycoon whose diary entries reflected a willingness to kill looked, from many angles, like a predictable outcome of the community that Ross had created and the role that Ross had assumed within that community.

An open source financial network looked to Patrick like just what was needed to shake up the privileged elite who ran and disproportionately benefited from the existing financial system. The Bitcoin network seemed to make it at least a little bit harder for Wall Street to collect tolls at every step of every financial transaction.

Roger had recently begun comparing Bitcoin to the honey badger, the weasel-like equatorial mammal that has a reputation for being able to overpower and even castrate the most ferocious predator.

This was the one time Ross had connected his own e-mail address with altoid and Ross had realized his mistake and deleted it. But his e-mail was captured in the forum posting of someone else who had responded to Ross, leaving his name out there for the search engines. As much as Ross had wanted to create a new world, he still had to occasionally interact with the old one, searchable by Google, and that, rather than any mistakes in the new world, was what did him in.

Bobby had a natural interest for the same reasons as his brother. The two men, who grew up sharing a bedroom, had both studied computer science, Charlie at MIT, Bobby at Stanford. Perhaps more important, both grew up in the Ivory Coast as the children of Chinese immigrants who had escaped the communist revolution with only the wealth they had stored in gold.

The controls also made it harder for China’s rising middle class to invest in anything that wasn’t Chinese. It was all but impossible to buy American or European stocks and bonds. This meant that ordinary Chinese investors eagerly latched onto every half-plausible new investment opportunity that presented itself.

As a gambling man, Bobby knew that China was a nation of people with an unusual willingness to place a bet on just about anything. That is what made the Las Vegas of China, Macao, seven times bigger, in revenue terms, than Las Vegas. While Bitcoin’s speculative nature and volatility were a strike against it in many countries, in China these had the potential to be its most attractive qualities.

The Chinese government had stepped right into the middle of the ongoing debate about how to define Bitcoin and had actually found itself in agreement with Wences Casares and many other advocates for Bitcoin, who believed that in 2013 the files on the blockchain were more similar to commodities, like gold, than to currencies, like dollars and euros,

The Argentinian hoteliers might not have been libertarians, but they would have easily understood Satoshi’s early writing about Bitcoin, which explained that “the root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” Mismanagement of currencies was a part of daily life in Argentina.

no more paying the credit card companies 2.5 percent of each transaction (the company helping Overstock take Bitcoin, Coinbase, charged Overstock 1 percent); no more dealing with chargebacks from customers who received shipments and then disputed the charges; and no more worrying about holding lots of sensitive financial information for customers. On the first day, Overstock processed more than $100,000 in orders paid for with Bitcoins.

Hoffman, an expert on social networks, had been captivated by Songhurst’s arguments about the power of the incentives built into Bitcoin—primarily through the mining process—that encouraged new users to join the decentralized network while also encouraging powerful miners to do what was best for the system so as not to see their holdings lose value. “That’s actually super important,” Hoffman would say later. “That makes it less of a pure technological marvel and more of a potential social movement.”

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.

“Why did you create Bitcoin, sir?” one reporter shouted. “OK, no questions right now,” Nakamoto said, with a Japanese accent. Nakamoto didn’t want to talk; he wanted someone to take him to lunch. When someone else stuck a recorder in his face, he said: “Wait a minute, I want free lunch first. I’m going to go with this guy,” pointing at a Japanese reporter for the Associated Press.

For banks that were terrified of cyber attacks, the idea of a payment network that could keep running even if one player, or one set of servers, got taken out was incredibly attractive.

Many in the existing Bitcoin community scoffed at the idea that the blockchain concept could be separated from the currency. As they viewed it, the currency, and the mining of the currency, was what gave users the incentive to join and power the blockchain. Given that a blockchain could be taken over and subverted if an attacker controlled more than 50 percent of the computing power on the network, a blockchain was only as secure as the amount of computing power hooked into the network.

Bitfury was so good that it soon threatened to represent more than 50 percent of the total mining power in the world; this would give it commanding power over the functioning of the network. The company managed to assuage concerns, somewhat, only when it promised never to go above 40 percent of the mining power online at any time. Bitfury, of course, had an interest in doing this because if people lost faith in the network, the Bitcoins being mined by the company would become worthless.

now, only people with access to super-powered computer chips and cheap energy were able to take part in the mining and transaction recording process—something that a small handful of companies were dominating. As had happened with several previous decentralized systems, this one had naturally tended toward greater centralization because of the efficiency made possible by specialization. This looked, increasingly, like Napster giving way to iTunes.

The DEA agent, who had the impossibly colorful name Carl Mark Force IV, had been the one controlling the undercover Silk Road account nob.

The transaction that created new Bitcoins would be referred to as the coinbase of each block.