Digital Gold

by Nathaniel Popper

  DEDICATION

  FOR MY MOM AND DAD

  CONTENTS

  Dedication

  Introduction

  Part One Chapter 1

  Chapter 2

  Chapter 3

  Chapter 4

  Chapter 5

  Chapter 6

  Chapter 7

  Chapter 8

  Chapter 9

  Chapter 10

  Chapter 11

  Part Two Chapter 12

  Chapter 13

  Chapter 14

  Chapter 15

  Chapter 16

  Chapter 17

  Chapter 18

  Chapter 19

  Chapter 20

  Chapter 21

  Chapter 22

  Part Three Chapter 23

  Chapter 24

  Chapter 25

  Chapter 26

  Chapter 27

  Chapter 28

  Chapter 29

  Chapter 30

  Chapter 31

  Technical Appendix

  Acknowledgments

  Sources

  Index

  About the Author

  Credits

  Copyright

  About the Publisher

  INTRODUCTION

  It was after midnight and many of the guests had already gone to bed, leaving behind their amber-tailed tumblers of high-end whiskey. The poker dealer who had been hired for the occasion from a local casino had left a half hour earlier, but the remaining players had convinced her to leave the table and cards so that they could keep playing. The group still hovering over the felt and chips was dwarfed by the vaulted, wood-timbered ceiling, three stories up. The large wall of windows on the far side of the table looked out onto a long dock, bobbing on the shimmering surface of Lake Tahoe.

  Sitting at one end of the table, with his back to the lake, twenty-nine-year-old Erik Voorhees didn’t look like someone who three years earlier had been unemployed, mired in credit card debt, and doing odd jobs to pay for an apartment in New Hampshire. Tonight Erik fitted right in with his suede oxfords and tailored jeans and he bantered easily with the hedge fund manager sitting next to him. His hairline was already receding, but he still had a distinct, fresh-faced youthfulness to him. Showing his boyish dimples, Erik joked about his poor performance at their poker game the night before, and called it a part of his “long game.”

  “I was setting myself up for tonight,” he said with a broad toothy smile, before pushing a pile of chips into the middle of the table.

  Erik could afford to sustain the losses. He’d recently sold a gambling website that was powered by the enigmatic digital money and payment network known as Bitcoin. He’d purchased the gambling site back in 2012 for about $225, rebranded it as SatoshiDice, and sold it a year later for some $11 million. He was also sitting on a stash of Bitcoins that he’d begun acquiring a few years earlier when each Bitcoin was valued at just a few dollars. A Bitcoin was now worth around $500, sending his holdings into the millions. Initially snubbed by investors and serious business folk, Erik was now attracting a lot of high-powered interest. He had been invited to Lake Tahoe by the hedge fund manager sitting next to him at the poker table, Dan Morehead, who had wanted to pick the brains of those who had already struck it rich in the Bitcoin gold rush.

  For Voorhees, like many of the other men at Morehead’s house, the impulse that had propelled him into this gold rush had both everything and nothing to do with getting rich. Soon after he first learned about the technology from a Facebook post, Erik predicted that the value of every Bitcoin would grow astronomically. But this growth, he had long believed, would be a consequence of the multilayered Bitcoin computer code remaking many of the prevailing power structures of the world, including Wall Street banks and national governments—doing to money what the Internet had done to the postal service and the media industry. As Erik saw it, Bitcoin’s growth wouldn’t just make him wealthy. It would also lead to a more just and peaceful world in which governments wouldn’t be able to pay for wars and individuals would have control over their own money and their own destiny.

  It was not surprising that Erik, with ambitions like these, had a turbulent journey since his days of unemployment in New Hampshire. After moving to New York, he had helped convince the Winklevoss twins, Tyler and Cameron, of Facebook fame, to put almost a million dollars into a startup he helped create, called BitInstant. But that relationship ended with a knock-down, drag-out fight, after which Erik resigned from the company and moved to Panama with his girlfriend.

  More recently, Erik had been spending many of his days in his office in Panama, dealing with investigators from the US Securities and Exchange Commission—one of the top financial regulatory agencies—who were questioning a deal in which he’d sold stock in one of his startups for Bitcoins. The stock had ended up providing his investors with big returns. And the regulators, by Erik’s assessment, didn’t seem to even understand the technology. But they were right that he had not registered his shares with regulators. The investigation, in any case, was better than the situation facing one of Erik’s former partners from BitInstant, who had been arrested two months earlier, in January 2014, on charges related to money laundering.

  Erik, by now, was not easily rattled. It helped that, unlike many passionate partisans, he had a sense of humor about himself and the quixotic movement he had found himself at the middle of.

  “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 BITCOIN CONCEPT first came onto the scene in more modest circumstances, five years earlier, when it was posted to an obscure mailing list by a shadowy author going by the name Satoshi Nakamoto.

  From the beginning, Satoshi envisioned a digital analog to old-fashioned gold: a new kind of universal money that could be owned by everyone and spent anywhere. Like gold, these new digital coins were worth only what someone was willing to pay for them—initially nothing. But the system was set up so that, like gold, Bitcoins would always be scarce—only 21 million of them would ever be released—and hard to counterfeit. As with gold, it required work to release new ones from their source, computational work in the case of Bitcoins.

  Bitcoin also held certain obvious advantages over gold as a new place to store value. It didn’t take a ship to move Bitcoins from London to New York—it took just a private digital key and the click of a mouse. For security, Satoshi relied on uncrackable mathematical formulas rather than armed guards.

  But the comparison to gold went only so far in explaining why Bitcoin ended up attracting such attention. 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, just as all the websites in the world exist only within the decentralized network known as the Internet. Like the Internet, the Bitcoin network wasn’t run by some central authority. Instead it was built and sustained by all the people who hooked their computers into it, which anyone in the world could do. With the Internet, what connected everyone together was a set of software rules, known as the Internet protocol, which governed how information moved around. Bitcoin had its own software protocol—the rules that dictated how the system worked.

  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 o
f dedicated followers saw that at its base, Bitcoin was, very simply, a new way of creating, holding, and sending money. Bitcoins were not like dollars and euros, which are created by central banks and held and transferred by big, powerful financial institutions. This was a currency created and sustained by its users, with new money slowly distributed to the people who helped support the network.

  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. Just as the Internet took power from big media organizations and put it in the hands of bloggers and dissidents, Bitcoin held out the promise of taking power from banks and governments and giving it to the people using the money.

  This was all rather high-minded stuff and it attracted plenty of derision—most ordinary folks imagined it falling somewhere on the spectrum between Tamagotchi pet and Ponzi scheme, when they heard about it at all.

  But Bitcoin had the good fortune of entering the world at a utopian moment, in the wake of a financial crisis that had exposed many of the shortcomings of our existing financial and political system, creating a desire for alternatives. The Tea Party, Occupy Wall Street, and WikiLeaks—among others—had divergent goals, but they were united in their desire to take power back from the privileged elite and give it to individuals. Bitcoin provided an apparent technological solution to these desires. 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 like Erik Voorhees and many of his new friends. It didn’t hurt that if Bitcoin worked, it would make the early users fabulously wealthy. As Erik liked to say, “It’s the first thing I know where you can both get rich and change the world.”

  Given the opportunity to make money, Bitcoin was not only attracting disaffected revolutionaries. Erik’s host, Dan Morehead, had gone to Princeton and worked at Goldman Sachs before starting his own hedge fund. Morehead was a leading figure among the moneyed interests who had recently been pumping tens of millions of dollars into the Bitcoin ecosystem, hoping for big returns. In Silicon Valley, investors and entrepreneurs were clamoring to find ways to use Bitcoin to improve on existing payment systems like PayPal, Visa, and Western Union and to steal Wall Street’s business.

  Even people who had little sympathy for Occupy Wall Street or the Tea Party could understand the benefits of a more universal money that doesn’t have to be exchanged at every border; the advantages of a digital payment method that doesn’t require you to hand over your identifying information each time you use it; the fairness of a currency that even the poorest people in the world can keep in a digital account without paying hefty fees, rather than relying only on cash; and the convenience of a payment system that makes it possible for online services to charge a penny or a dime—to view a single news article or skip an ad—skirting the current limits imposed by the 20- or 30-cent minimum charge for a credit card transaction.

  In the end, though, many of the people interested in more practical applications of Bitcoin still ended up talking about the technology in revolutionary terms: as an opportunity to make money by disrupting the existing status quo. At the dinner a few hours before the late-night poker game, Morehead had joked about the fact that, at the time, all the Bitcoins in the world were worth about the same amount as the company Urban Outfitters, the purveyor of ripped jeans and dorm room decorations—around $5 billion.

  “That’s just pretty wild, right?” Morehead said. “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.”

  Many bankers, economists, and government officials dismissed the Bitcoin fanatics as naive promoters of a speculative frenzy not unlike the Dutch tulip mania four centuries earlier. On several occasions, the Bitcoin story bore out the warnings of the critics, illustrating the dangers involved in moving toward a more digitized world with no central authority. Just a few weeks before Morehead’s gathering, the largest Bitcoin company in the world, the exchange known as Mt. Gox, announced that it had lost the equivalent of about $400 million worth of its users’ Bitcoins and was going out of business—the latest of many such scandals to hit Bitcoin users.

  But none of the crises managed to destroy the enthusiasm of the Bitcoin believers, and the number of users kept growing through thick and thin. At the time of Morehead’s gathering, more than 5 million Bitcoin wallets had been opened up on various websites, most of them outside the United States. The people at Morehead’s house represented the wide variety of characters who had been drawn in: they included a former Wal-Mart executive who had flown in from China, a recent college graduate from Slovenia, a banker from London, and two old fraternity brothers from Georgia Tech. Some were motivated by their skepticism toward the government, others by their hatred of the big banks, and yet others by more intimate, personal experiences. 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.

  It was these people, in different places with different motivations, who had built Bitcoin and were continuing to do so, and who are the subject of this story. The creator of Bitcoin, Satoshi, disappeared back in 2011, leaving behind open source software that the users of Bitcoin could update and improve. Five years later, it was estimated that only 15 percent of the basic Bitcoin computer code was the same as what Satoshi had written. Beyond the work on the software, Bitcoin, like all money, was always only as useful and powerful as the number of people using it. Each new person who joined in made it that much more likely to survive.

  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. Each of the people discussed in this book had his or her own reason for chasing this new idea, but all their lives have been shaped by the ambitions, greed, idealism, and human frailty that have elevated Bitcoin from an obscure academic paper to a billion-dollar industry.

  For some participants, the outcome has been the type of wealth on display at Morehead’s house, where the stone entranceway is decorated with Morehead’s personal heraldic crest. For others, it has ended in poverty and even prison. Bitcoin itself is always one big hack away from total failure. But even if it does collapse, it has already provided one of the most fascinating tests of how money works, who benefits from it, and how it might be improved. It is unlikely to replace the dollar in five years, but it provides a glimpse of where we might be when the government inevitably stops printing the faces of dead presidents on expensive paper.

  The morning after the big poker game, as the guests were packing up to go, Voorhees sat at the end of the pier behind Morehead’s house, which was sitting high above the water after a winter with little snowfall. The joy he had shown at the poker table the night before was gone. He had a look of chagrin on his face as he talked about his recent decision to resign as the CEO of the Bitcoin startup he had been running in Panama. His position with the company had prevented him from speaking about the revolutionary potential of Bitcoin, for fear that it could hurt his company.

  “My passion is not running a business, it is building the Bitcoin world,” he explained.

  On top of that, his girlfriend had grown tired of living in Panama and Erik was missing his family back in the United States. In a few weeks he was planning to move back to Colorado, where he grew up. Because of Bitcoin, though, he would be going home a very different per
son from what he was when he left. It was a situation that many of his fellow Bitcoiners could sympathize with.

  PART ONE

  CHAPTER 1

  January 10, 2009

  It was a Saturday. It was his son’s birthday. The Santa Barbara weather was beautiful. And his sister-in-law was in from France. But Hal Finney needed to be at his computer. This was a day he had been anticipating for months and, in some sense, for decades.

  Hal didn’t even try to explain to his wife, Fran, what was occupying him. She was a physical therapist and rarely understood his computer work. But with this one, where would he even begin? Honey, I’m going to try to make a new kind of money.

  That, in essence, was his intention when, after a long morning run, he sat down in his modest home office: a corner of his living room with an old sectional desk, taken up primarily by four computer screens of different shape and make, all wired to the separate computers he used for work and personal pursuits. Any space that wasn’t occupied by computer equipment was covered in a jumble of papers, exercise books, and old programming manuals. It wasn’t much to look at. But sitting there, Hal could see his patio on the other side of his living room, bathed in California sun, even in the middle of January. On the carpet to his left lay Arky, his faithful Rhodesian ridgeback, named after a star in the constellation Boötes. This was where he felt at home, and where he had done much of his most creative work as a programmer.

  He fired up his hulking IBM ThinkCentre, settled in, and clicked on the website he’d gotten in an e-mail the previous day while he was at work: www.bitcoin.org.

  Bitcoin had first crossed his screen a few months earlier, in a message sent to one of the many mailing lists he subscribed to. The back-and-forth was usually between the familiar personalities he’d been talking to for years who inhabited the relatively specialized corner of coding where he worked. But this particular e-mail came from an unfamiliar name—Satoshi Nakamoto—and it described what was referred to as an “e-cash” with the catchy name Bitcoin. Digital money was something Hal had experimented with for a long time, enough to make him skeptical about whether it could ever work. But something jumped out in this e-mail. 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 was particularly drawn to Satoshi’s claim that users could own and trade Bitcoins without providing identifying information to any central authorities. Hal had spent most of his professional life working on programs that allowed people to elude the ever-watchful gaze of the government.