Digital Gold

by Nathaniel Popper

  Pete had a habit of taking long, anxiety-inducing pauses before responding to anything, and his first questions for Wences were distinctly skeptical. But his subsequent questions suggested that something was clicking. Pete’s job as an investor in distressed companies made him good at spotting broken systems, and the more he thought about it, the more broken the current methods of moving money around the world seemed to him.

  Something else caught Pete’s attention. Wences had put his wallet where his mouth was. Throughout 2012 Wences had methodically ramped up the pace of his Bitcoin purchases, so that now he had over 10 percent of his net wealth—tens of millions of dollars—in Bitcoin. Pete respected numbers and bold, confident moves like the one Wences had made.

  From the ski lodge, Pete e-mailed one of his most trusted lieutenants at Fortress, Bill Tanona, and asked what Bill knew about Bitcoin. When he got back to San Francisco he opened a Mt. Gox account and quickly built up his own $100,000 position in Bitcoin. At work, he started talking with Tanona and a few other colleagues about how Fortress could get involved in this new market.

  CHAPTER 16

  December 2012

  For all the new mainstream interest, the most successful entrepreneur in the Bitcoin world was still Ross Ulbricht, the operator of the world’s largest online drug bazaar. Silk Road had continued adding new members and new products through 2012. Some $1.2 million worth of Bitcoin was changing hands each month, spinning off $92,000 in commissions for Ross. By the end of 2012 there were seventy thousand different topics on Silk Road’s forum, and there were even resident security experts who helped users ensure their anonymity and a resident doctor who answered questions about drugs and their health effects.

  Initially, Ross had enjoyed the success by traveling to Southeast Asia and Costa Rica. But as the year went on, the site increasingly required all-consuming work. Ross now had several moderators and administrators on staff who helped him deal with customer support and mediate disputed transactions. He chose members whom he trusted, even when he didn’t know their identity.

  In the fall of 2012 Ross had moved in with a childhood friend on a hilly street in one of San Francisco’s residential neighborhoods. He could have afforded his own place, but by now he was trying to leave as few traces as he could for the authorities to pick up on. His work on Silk Road was done at an Internet café around the corner from his friend’s house; at this café he would log in remotely to Silk Road’s servers, making it that much harder for anyone to find him.

  Ross was becoming acutely aware of just how difficult it was to remain anonymous even with the best technologies. Over the summer, a Silk Road user had managed to follow a series of transactions and find one of Silk Road’s main Bitcoin wallets, which contained coins worth about $2 million. This didn’t cover any losses, but it was a reminder that while Bitcoin did not require users to provide an identity, accounts were pseudonymous, attached to a particular identity, rather than anonymous. In Australia, police traced transactions to make the first arrests of Silk Road vendors in that country.

  None of this, though, dented Ross’s boldness and ambitions for the site—if anything, he grew more committed as time went on. On the forums, under his screen name Dread Pirate Roberts, or DPR, he wrote that he would keep this up to his “last breath”:

  Once you’ve seen what’s possible, how can you do otherwise? How can you plug yourself into the tax eating, life sucking, violent, sadistic, war mongering, oppressive machine ever again? How can you kneel when you’ve felt the power of your own legs?

  As Dread Pirate Roberts, Ross became a kind of folk hero for his members, engaging with them on the Philosophy, Economics, and Law section of the forum and later on DPR’s Book Club, where he advocated for a world in which “the human spirit flourishes, unbridled, wild and free!”

  As time went on, though, it was hard to avoid the growing reminders of the dangers of living in an anonymous world with no source of authority. In November 2012 a hacker threatened to release an enormous trove of data about Silk Road users if Ross didn’t pay a ransom. That was soon followed by a denial-of-service attack that eventually forced the site down. The only way Ross was able to get the attack to stop was by paying the attacker $25,000. When the site came back online, Dread Pirate Roberts’s style and approach had shifted, leading some users to suspect that the site had changed hands. Ross explained that he was changing his writing style to elude capture.

  In November, Ross flew to Dominica, an island in the Caribbean known for being an easy place to secure “economic citizenship” (Roger Ver was also trying to obtain citizenship from the country). The small island offered a passport in exchange for a $75,000 donation. The sum was no problem for Ross and he began filling out the application on his laptop, listing his profession as “IT consulting.” A new passport would allow him to move that much further out of the reach of a government that he knew was chasing him.

  He was, though, getting used to his new life. When he chatted with a Silk Road member, scout, who was thinking about joining his staff, Ross answered scout’s concerns about getting arrested by explaining why he believed it would be hard to ever get caught.

  “put yourself in the shoes of a prosecutor trying to build a case against you,” he said in a chat with scout. “Realistically, the only way for them to prove anything would be for them to watch you log in and do your work.”

  But Ross acknowledged how much even the small possibility weighed on him.

  “the biggest con about this work is not the risk of going to jail or having your life disrupted,” he wrote; “it’s getting used to and living with that possibility no matter how remote.”

  “and,” he added, “keeping your work a secret.”

  By now he had been hardened enough that he knew how to keep things to himself. Even the friend he was living with and the girl he began dating didn’t know. The only people with whom he could be honest were the users and administrators of his site, who didn’t know his identity, and it was becoming increasingly hard to believe that he could trust even them. Silk Road forums were rife with debate about which users and vendors on the site were likely to be undercover cops. One of the most vigorous debates sprang up around a user named nob. Toward the end of 2012, nob put up a listing for a kilogram of cocaine for $27,000 in Bitcoins. nob had done almost no reviewed sales of drugs on the site and many other users were very suspicious.

  “If this acct isn’t [law enforcement], it’s some other bullshit for sure,” a user named MC Haberdasher wrote on the forum. “I’d rather wake up from a heroin induced blackout sitting bitch in a car full of fat chicks listening to speed garage than even attempt to order from this guy.”

  In this case, though, Ross trusted nob, who had slowly built a relationship with him over the course of the previous year. Ross decided to help nob sell his kilogram of cocaine, connecting him with one of the site administrators, chronicpain, who had been the first employee Ross hired back in 2011. The administrator was, in real life, Curtis Green, a forty-seven-year-old poker player and grandfather living just outside Salt Lake City.

  Green found a buyer for nob’s cocaine and offered to receive the package at his home before sending it on to the buyer. The package was delivered to Green’s house on January 17, 2013. Just as he took it inside and was opening the package to check its contents, a SWAT team swarmed in. As the agents spread through the house, they found a stack of black, custom-made Bitcoin-mining machines. The floor around the computers, and in the rest of the house, was littered with hardened dog shit.

  Even after Ross learned about Green’s arrest—and his release on bail—he did not assume that it was nob who had compromised the deal. Ross had always been somewhat skeptical about Green, believing that he was doing it for the money rather than the ideals. Ross asked nob (who he still believed was a powerful drug dealer) if he could have Green “beat up, then forced to send the Bitcoins he stole back.”

  nob agreed to the proposition. But a day later, Ross chan
ged his mind: “can you change the order to execute rather than torture?”

  Ross explained to nob that he was concerned that Green would give the authorities information about Silk Road users, potentially jeopardizing the whole site and its grand mission. He said that he had “never killed a man or had one killed before, but it is the right move in this case.”

  The federal agents who had Green in custody, and who were the undercover puppeteers behind the user nob, obliged by staging Green’s death (without actually killing him), and e-mailing bloody photos to Ross. When the photos came through, Ross responded that he was “a little disturbed, but I’m ok.”

  “I’m new to this kind of thing is all,” he said, before quickly adding: “I don’t think I’ve done the wrong thing.”

  The purported murder of Green was paid for with a transfer of $80,000 to a Capital One Bank account in Washington, DC. The money was sent through an anonymous money-transferring service in Australia that hid the location and identity of the sender. But the agents were already digging into the wealth of information on Green’s computers, seeking clues to find their way to their real quarry, Dread Pirate Roberts himself.

  CHAPTER 17

  January 2013

  Ross Ulbricht was not the only Bitcoin entrepreneur who had gotten himself into something bigger than he could have ever imagined. In January Charlie Shrem’s BitInstant was taking in over $250,000 in commissions each month on record transaction volumes.

  But the growth obscured strains that were threatening to tear Charlie’s company apart. The fights with David Azar that had started almost as soon as BitInstant took David’s investment had grown worse and usually ended in a shouting match or a slammed-down phone. In December, Charlie and Erik Voorhees had looked to David’s investment partners, the Winklevoss twins, to help foster a more productive relationship.

  The brothers had been relatively hands-off after putting in their $550,000. But they had grown concerned from afar. The e-mail chains between Charlie and David signaled that the twins were not dealing with the cool, calculating entrepreneurs of their Harvard alumni circles. They saw that Charlie’s initially attractive energy came with a distressing inability to concentrate on one task. Between constant travel and media appearances, Charlie was relishing, perhaps too much, the elevated social status that Bitcoin was giving him. When Charlie did talk business, he often seemed more intent on selling the idea of Bitcoin than of his own company.

  There was another more immediate problem that the twins hadn’t bargained for. Earlier in the year, Erik and a friend he had brought into BitInstant, Ira Miller, had started an independent company called Satoshi Ltd. with a number of subsidiaries. One was a technology called Coinapult that BitInstant used to send Bitcoins via e-mail. Another, Paysius, allowed merchants to accept virtual currencies.

  The Winklevoss twins asked how Erik and Ira could run those businesses at the same time that they were working full-time for BitInstant. Erik and Ira proposed solving the issue by merging Satoshi Ltd. with BitInstant in exchange for a higher equity stake in BitInstant—all that David and the twins had to do was give up 1.5 percent of their own stake in the company.

  Around the New Year, Erik wrote up a lengthy strategy document listing how a merger could be handled, allowing the company to go after new markets like mobile payments in Africa and poker sites in need of payment networks around the world. The document reflected the team’s big ambitions. Erik and Ira didn’t want BitInstant to be just a place to buy Bitcoins. They wanted to offer all the services that banks did, in a new, cheaper, and more democratic way.

  But the Winklevoss twins and David Azar were thinking in more immediate and practical terms. Glancing at the pages of long-term strategy, they blanched at the value that Erik and Ira assigned to Satoshi Ltd.

  The twins wrote increasingly peeved e-mails to Charlie, pushing him to resolve the situation without giving in to Erik and Ira. The conversations between the twins and Charlie began to end with the same sort of recriminations that had been so common between Charlie and David weeks earlier. 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. The Winklevoss twins, meanwhile, confirmed the fears of the BitInstant team regarding what happened when people who didn’t care about the big principles underlying Bitcoin tried to make money in the space.

  Charlie and Erik reached out to Roger Ver, Charlie’s first investor, hoping he might be able to resolve things from Tokyo. Their idea was that Roger could buy out the stake that the twins and David had taken in BitInstant.

  “My one hope was that perhaps the Winklevii would be far more helpful and productive, but a long insult-filled call between Cameron and Charlie today proved that my hope was naive,” Erik wrote to Roger in early January.

  Charlie and Erik wrote a lengthy, acerbic letter to the twins, pleading for a resolution that would allow both sides to go their separate ways.

  “If we’re all being honest, then it’s clear we neither need nor want your money, and you neither need nor want to be risking your money with a team that you believe to be childish and 2/3rds expendable,” the letter said. “Let’s be gentlemen and move on. If you are so interested in building a Bitcoin business, and you are so skillful at navigating these waters, then I welcome you to go and do it.”

  The twins considered selling to Roger. But they also believed BitInstant was a good idea that could work under the right management. In January BitInstant had its best month ever, processing almost $5 million in transactions. The price of a Bitcoin, meanwhile, had risen from $13 at the beginning of the month to around $18 at its end. Some of this was due to the twins themselves. 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.

  The tension came to a breaking point at the end of January. Patrick Murck, the general counsel at the Bitcoin Foundation, flew in from Seattle to see if he could help Charlie and Erik make their argument to the twins. In a meeting in the BitInstant conference room, Charlie, Erik, and Patrick, sitting on one side of the table, offered to provide Maguire Ventures, the entity put together by David and the twins, with a full refund for the money they had put in. The twins responded angrily that they would accept no less than five times what they had put in. They also said that the technology being offered by Erik’s company, Satoshi Ltd., was worth little. Erik and Ira responded by walking out of the room as the twins “continued with emotional insults and absurdities,” Erik wrote in an e-mail after the meeting.

  The next day Erik and Ira sent in their resignations and moved into the offices of Larry Lenihan and FirstMark Capital; Lenihan had always been more interested in investing in Erik than in Charlie.

  Charlie, Roger, and Erik were in constant conversation, contemplating whether Charlie should join Erik, and if the whole group should sue the Winklevoss twins. They ultimately decided not to sue—mindful of the way the twins had responded when Mark Zuckerberg left them out of Facebook.

  Charlie decided he couldn’t leave the company he created, but when he went to work the next day, he did not go in peace. He demanded that Maguire Ventures deliver the final installment of the investment it had agreed to make the previous fall:

  “You guys are screwing up my company, and Ira and Erik left because of it. Give me my money or I will wire it all back to you today.”

  Roger, who still had a 15 percent stake in the company, continued pushing the twins to sell their stake in the company or let Roger sell his:

  You guys obviously don’t understand Bitcoin, or BitInstant.

  You are destroying your equity and mine, and I don’t want to be any part of it.

  If you disagree, then make me an offer for my 15% of BitInstant.

  Name your price.

  I will gladly sell it to you for less than the valuation you
bought in at.

  There was some confirmation of Roger’s assessment a few days after Erik left, when Charlie got a letter from the latest bank to decide that it would no longer service BitInstant’s accounts. It was unclear if BitInstant would have anywhere to put all the money customers were sending it. As the value of Bitcoin continued to shoot up, the value of Charlie’s idea seemed to be falling apart before his eyes.

  CHAPTER 18

  February 2013

  The desk where Wences Casares worked on his digital wallet, Lemon, was mounted on a treadmill, in an office overlooking the main shopping street in Palo Alto. His monitor was perched on a short pile of books, hardcover copies of Debt: The First 5,000 Years. When he spoke about Bitcoin with visitors to the office and invariably began talking about the history of money, he would frequently give them a copy of the book.

  Wences shared the space with Micky Malka, an old Venezuelan friend and business partner. Micky was a big investor in Lemon and chairman of the company’s board. Wences was, for his part, one of the largest investors in Micky’s venture capital firm, Ribbit Capital.

  Micky’s recently opened fund was technically focused on financial services. But after Wences got Micky excited about Bitcoin, Micky was trying to find virtual-currency investments. Because there were so few viable Bitcoin companies around, Micky made the somewhat controversial decision to use his investors’ money to buy Bitcoins themselves.

  Both Micky and Wences turned the office into a kind of virtual-currency salon, hosting a constant parade of interested visitors. Among them was Pete Briger, the chairman of Fortress Investment Group, who dropped by soon after the skiing trip, with his deputy Bill Tanona. Wences marveled at how quickly Pete had managed to get others at Fortress excited about Bitcoin, but when he heard Pete speak about it he understood why. Pete, a normally reserved man, got fired up when talking about the inefficient “oligopoly” that the big banks had over money movement and the transaction fees that the oligopoly forced everyone else to pay. 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. Pete assigned Tanona to the almost full-time job of exploring potential Bitcoin investments, and also drew in another top Fortress official, Mike Novogratz. All of them began buying coins in quantities that were small for them, but that represented significant upward pressure within the still immature Bitcoin ecosystem.