Digital Gold

by Nathaniel Popper

  FOR WENCES, THE allure of Bitcoin went deeper than just professional interest, to a time before he was wealthy and successful, during his childhood in a country that had been—and remained—locked in a seemingly intractable battle with its own currency.

  There was rarely a time during Wences’s youth when Argentina was not in some sort of financial crisis. In 1983, after years of staggering inflation, the government created a new peso, each one of which was worth 10,000 old pesos. That didn’t work and so in 1985 the new peso was replaced by the austral, which was worth 1,000 new pesos. Seven years later, continuing inflation led the government to go back to the peso, but this time pegged to the dollar, an experiment that eventually ended with a crushing financial crisis. During most of this time, inflation ran at over 100 percent a year, meaning that the value of money in the bank fell by half each year and often much more than that.

  Wences was descended from one of Argentina’s aristocratic families, but his particular branch had lost everything and ended up on a rustic sheep ranch out in the emptiness of Patagonia. When his father delivered wool and the check didn’t come through for a month, the value of the family income could fall sharply because of inflation, setting off yet another round of household cutbacks.

  “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.”

  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.

  These experiences gave Wences insights into the nature of money that most people in the world learn only from textbooks. 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. In Argentina, on the other hand, while the peso was used as a medium of exchange—for daily purchases—no one used it as a store of value. Keeping savings in the peso was equivalent to throwing away money. So people exchanged any pesos they wanted to save for dollars, which kept their value better than the peso. Because the peso was so volatile, people usually remembered prices in dollars, which provided a more reliable unit of measure over time.

  As Wences avidly pored over all the available writing about Bitcoin in the first months after discovering it, it seemed clear to him that for people in places like Argentina, Bitcoin might provide a much more efficient place to store money than the dollar. In Argentina, dollars had to be purchased through shady money changers, and were saved in closets or under the mattress. The promise of a virtual currency that could be bought and stored online, accessed from anywhere, and secured with a private key looked like a significant improvement.

  Wences began by purchasing a growing stockpile of Bitcoins from Mt. Gox in early 2012 and joined in the conversation on the forums and chat channels. When he wasn’t playing with Bitcoin, he devoured several books on the history of money, most significantly 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. 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.

  As he read, Wences felt that after twenty years of working on financial technology, he was finally coming to understand money for the first time. He saw that Bitcoin’s lack of any apparent intrinsic value didn’t matter when looked at against the history of money. 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.

  “We don’t use gold because it’s pretty—that was a stupid assumption of mine and many other people,” Wences would tell anyone who would listen during these days when he was totally immersed in the history. “No, we use it in jewelry because it’s very expensive. It’s not expensive because we use it in jewelry.”

  “What is the value?” he would ask. “It’s that it is the ledger. You put the ledger on your neck to show power and wealth. It isn’t a ledger where you have to trust a bank or anyone else.”

  Bitcoin, Wences came to believe, was a purer version of that sort of ledger—a commonly verifiable place where everyone could keep track of who owned what.

  Despite his fervor, Wences initially had trouble drumming up much interest among his Silicon Valley friends beyond a few fellow South Americans, who had grown up in places with similarly screwed-up currencies. Mostly he just got skeptical looks. For those who had heard of it, the first question was usually about whether it was anything more than a token for online drug dealers. Some remembered David Chaum’s DigiCash back in the 1990s, but anyone familiar with that experiment knew that it had gone under. The bigger question was why something like this was necessary in the first place. Credit cards and $20 bills did everything that most of Wences’s friends needed when it came to spending money. Why should they trust a digital code that had nothing backing it but the computers of some libertarian nerds?

  After months of trying, Wences finally made a breakthrough with one of his best friends, and the one whose opinion in this area mattered most: David Marcus, who had recently become the president of PayPal. Like Wences, Marcus was a foreigner in the Valley. He had grown up in France and Switzerland, and had the same slender stature, unassuming presence, and seemingly effortless sophistication as Wences. But after spending a decade on payment startups, Marcus was used to hearing grand claims about technologies that would revolutionize the way money moved around the Internet. He also had experienced the overbearing regulatory scrutiny that falls on any company that wants to deal with money.

  But in the fall of 2012 Marcus had a conversion moment when the Argentinian government ordered his company, PayPal, to cut off direct payments between Argentinians, a new prong in the government’s effort to slow the movement of pesos into other currencies. With Wences’s arguments ringing in his head, Marcus watched as the policy went into effect and the price of Bitcoin rose, suggesting to Marcus that Argentinians were seeking out Bitcoin as a way around the government’s restrictions. He quietly set up an account with Mt. Gox and began buying coins. In doing so, Marcus became one of the first of many important converts that Wences would win to the Bitcoin cause.

  WENCES RAN HIS digital-wallet company with an old friend in Argentina, Federico Murrone, or Fede. Unlike Wences, who had an aristocratic lineage, Fede came from a working-class family and looked like a tough biker. The two had connected as teenagers on Wences’s first startup, creating Argentina’s first Internet provider, and they had been close friends ever since, with Fede providing the programming smarts for Wences’s ideas, always from Argentina, where Fede stayed to be close to h
is family.

  Wences traveled to Buenos Aires every few months to check in with Fede and his team of Argentinian coders. Each time Wences visited in 2012, the reminders of what it was like to live in a country with broken money strengthened his belief in the potential for Bitcoin.

  Like other smart visitors to the country, Wences went to a black market money changer whenever he needed pesos to spend. Credit cards and ATMs were available, but they provided pesos at the official government exchange rate, which was about 35 percent lower than the rate available on the street in 2012. The government wanted to make changing money into dollars unattractive, with its official exchange rate, because it was afraid that its citizens would sell off all their pesos for dollars, driving the exchange rate down even further and devastating the economy. The government had recently started fining economists who challenged its official exchange rate. As 2012 went on, the situation grew progressively worse, and this is what had led the government to crack down on PayPal.

  The inflation rate wasn’t the only problem with the local financial system. 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. People were left to pay their bills in cash at the drugstore, so they had to carry around wads of 100-peso bills. This too, seemed like something that Bitcoin, with its secure digital wallet, could help address.

  At the Lemon offices in Buenos Aires, Wences and Fede were supposed to be working on their new startup, but they would end up spending hours playing with Bitcoin and talking about how they might harness its potential. In late 2012 the two men organized the first-ever Bitcoin Meetup in Argentina at a favorite whiskey bar. It was sparsely attended, other than by the friends that Wences and Fede had already sold on the technology. The small crowd was not surprising given how hard it was to get Bitcoins in Argentina. It was incredibly expensive and difficult to transfer money from an Argentinian bank to Mt. Gox or another foreign Bitcoin exchange. And no Argentinian bank would work with a domestic Bitcoin company.

  But there was a budding conversation about Bitcoin on an Argentinian website dedicated to protecting online freedom. When Wences was in Argentina, he would offer to sell some of his Bitcoins after work at a bar near the Lemon offices. Each time, a different crew of people would show up, but one older gentleman kept coming back, buying a little more each time. He had a silent, sullen countenance and didn’t seem technologically sophisticated. After the man made a particularly large purchase one day, Wences gently asked him if he understood the risks involved with Bitcoin.

  “It seems to me like this is a lot of money, and this is very risky,” Wences told him as politely as he could. “You know you could lose it all?”

  “How many times has your family lost everything keeping their money in the peso?” the man asked Wences.

  “Three, maybe four, times,” Wences said.

  “Yes. For me it’s been more times than that,” the man said.

  The man admitted that he had the option of putting his money in dollars but that this would require him to take a distorted exchange rate and then hide the bills in his closet. And who knew when the dollar might suffer the same problems as the peso?

  “There is no way you can convince me to keep my money in the peso,” he said.

  BITCOIN HAD CAUGHT Wences at a decisive moment in his life—what an American might call a midlife crisis. He already had many successes under his belt, as was evident from his estate in the rolling hills above Palo Alto, with two homes, a swimming pool, tennis courts, and views down to the bay. In addition to the tens of millions of dollars Wences had earned from selling past startups, he had been surprised to discover that he also had a knack for picking winning investments in his friends’ companies.

  But he had recently been hitting up against failure for the first time. Lemon, his current startup, had grown out of the decline of his previous startup, Bling Nation, and many of Wences’s friends wondered whether Lemon was the result of the kind of passion necessary to succeed in Silicon Valley or was just Wences’s attempt to prove that the failure of Bling Nation had been an anomaly. There were already signs that Lemon was not getting the kind of pickup that Wences had imagined. And, as with all startups, it required more time from its chief executive than any one person had in a day. This was Wences’s twelfth startup, depending on how you counted, and his wife once again felt like a single mother for their three children. Wences and Belle had already agreed that Lemon would be his last startup.

  These difficulties played into larger insecurities that Wences had managed to sweep under the carpet until now. For all the money his past startups had made him, none had quite achieved their grand original goals. Back in Argentina, he had hoped that his first company, Patagon, would provide a way to extend financial services to the hundreds of millions of South Americans without a basic bank. In the end, though, he couldn’t get a banking license, and the online financial firm he created was used mainly by South America’s wealthy elite.

  For Wences, Bitcoin seemed to address many of the problems that he’d long wanted to solve, providing a financial account that could be opened anywhere, by anyone, without requiring permission from any authority. He also saw an infant technology that he believed he could help grow to dimensions greater than anything he had previously achieved.

  Wences’s wife, Belle, was used to watching Wences dive headfirst into new technological discoveries. His easily incited passion and his ability to convey it were part of what made him such a great startup salesman. He could impart his excitement with a rare skill. But usually the initial ardor passed before long. That was showing no signs of happening with Bitcoin. As 2012 went on, Belle realized that this might be different from his previous endeavors. Belle herself resented how much time Bitcoin was taking out of Wences’s already full schedule. But even she was becoming entranced by the almost mythical nature of this currency and its mysterious founder. She soon started swapping her own theories with Wences on the identity of Satoshi.

  IN EARLY JANUARY, Wences traveled with a group of some of the West Coast’s most wealthy and powerful men to an isolated lodge in the Canadian Rockies with its own wine cellar, sauna, and private staff. Their host was Pete Briger, whom Wences had met a few years earlier through an organization for young chief executives. Even among the rich and powerful, Briger stood out. After attending Princeton and working at Goldman Sachs for fifteen years, he had risen to the top of the Fortress Investment Group, a firm overseeing an array of enormous private equity and hedge funds.

  Briger was a big gruff man, who was known for his bold bets on distressed debt—the troubled bonds and loans that everyone else was too afraid to touch, and that gave Briger and his firm arm-twisting leverage over large companies and occasionally small countries. He sometimes called himself a “financial garbage collector” and he looked the part. In 2009 Briger had been named cochairman of Fortress, which then controlled investments worth around $30 billion, including the resort company that owned the lodge where the men were staying.

  Wences was not an alpha male like most of the other guests. He liked to stay in touch with his humble origins in Patagonia, and his driveway was filled with Subarus instead of Teslas or sport cars. 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.

  The morning after they arrived at the Valemont lodge, Wences, Briger, and the rest of the men climbed into a red-and-white Bell 212 helicopter sitting just outside the lodge and lifted off toward the high white peaks, for a day of heli-skiing. In the afternoon, the group returned to the lodge and sat around in the expansive c
ommon room, an enormous fire crackling away. This was not a crowd to chat about kids and the upcoming Super Bowl. The men had dedicated their lives to making money and Pete pressed them to present their best investment ideas.

  “Pete, I told you, I’m interested in Bitcoin,” Wences said when his turn came to talk. “It hasn’t changed.”

  Wences drew the group in with an explanation of the basic notion of a new kind of network that could allow people to move money anywhere in the world, instantaneously—something that these financiers, who were frequently moving millions between banks in different countries, could surely appreciate.

  “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.”

  The blockchain technology made that previously impossible task possible. But it was much more than that, Wences emphasized. It was the next step in the evolution of money. He tried to explain his recent discoveries about the ledger as the foundation of all money. With Bitcoins, unlike pesos or dollars, everyone using them knew exactly how many existed, and they were not tied to one country. Unlike gold, which was universal but difficult to acquire and hold, Bitcoins could be bought, held, and transferred by anyone with an Internet connection, with the click of a mouse.

  “Bitcoin is the first time in five thousand years that we have something better than gold,” he said. “And it’s not a little bit better, it’s significantly better. It’s much more scarce. More divisible, more durable. It’s much more transportable. It’s just simply better.”