Digital Gold

by Nathaniel Popper

  The purchases being made by Fortress—and by Micky’s team at Ribbit—were supplemented by those being made by the Winklevoss twins, who were still trying to buy up 1 percent of all the outstanding Bitcoins. Together, these purchases helped maintain the sharp upward trajectory of Bitcoin’s price, which rose 70 percent in February after the 50 percent jump in January. On the evening of February 27 the price finally edged above the long-standing record of $32 that had been set in the hysterical days before the June 2011 crash at Mt. Gox.

  ON THE AFTERNOON of Sunday, March 3, Wences boarded a Gulfstream two-engine jet at a private airport in San Jose favored by the Silicon Valley elite.

  Wences was headed to one of the most exclusive, and secretive, annual gatherings of tech-industry power players, held at the Ritz-Carlton resort outside Tucson, Arizona, and hosted by the investment bank Allen & Co. Only a few hundred people were invited and it was private enough that the news media rarely even found out it was happening.

  Wences flew to the conference on eBay’s private jet. eBay owned PayPal, the company headed up by Wences’s good friend David Marcus, and David was among the twelve passengers on the flight. He had been quietly working to make sure PayPal was ahead of the curve on virtual currencies and had pulled together a group in-house to look at how PayPal might harness the Bitcoin technology. He had also begun to talk about it with his boss, John Donahoe, the chief executive of eBay.

  When the eBay jet touched down north of Tucson, the passengers were quickly whisked away in SUVs to the Dove Mountain Resort, which sat in the foothills of the mountains that separate Tucson and Phoenix. That evening, everyone congregated for drinks on the Tortelita Terrace and then proceeded to dinner on an immaculately maintained lawn overlooking the scrubby mountains.

  This was the most casual dinner of the three-day event, with unassigned seating and a buffet to accommodate the guests arriving at uneven intervals. Wences took notice as the big names showed their faces: Twitter’s chief executive, Dick Costolo; LinkedIn’s founder Reid Hoffman; Rupert Murdoch’s son, James; and perhaps the most recognizable venture capitalist in Silicon Valley, Marc Andreessen, an enormous man with a shiny bald head.

  Wences found his way to a table with another budding Bitcoin nut, Chris Dixon, one of the up-and-coming stars at Andreessen’s firm, Andreessen Horowitz. The men quickly began comparing ideas. Dixon explained that he had gotten excited about the importance of the blockchain protocol as a new way of moving value around the world, just as the Internet protocol had provided a decentralized way to move information. Dixon had been pushed to think about this by the writings of Fred Wilson, the New York venture capitalist who had backed Wences’s first big company.

  Wences smiled with gratitude to find someone who had seen the beauty of the system without his help. Wences, in turn, told Dixon about the international potential he saw for Bitcoin, in countries like Argentina where people lack a safe place to keep their money. Dixon hadn’t thought much about that opportunity and asked Wences to tell him more.

  They were interrupted by Henry Blodget, a former Wall Street analyst and founder of the news site Business Insider, who asked what they were talking about: he had never heard of Bitcoin. Wences responded with his favorite introductory line: “It’s the best form of money the world has ever seen.”

  Blodget’s famously childlike curiosity provided a great opening for Wences to work through all of his finely honed arguments.

  After touching on the history of money and Bitcoin’s advantages over gold, 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.

  The conversation continued as the sun went down and the desert air grew chilly. The little crowd around Wences’s table grew, with Marcus and others stopping by.

  Wences saw the interest build when he told one of his newest stories from Argentina. A friend of his sister had recently wanted to buy an upscale $1.5 million apartment in Buenos Aires. As with most Argentinian real estate transactions, the seller—distrustful of the peso—wanted the payment in dollars and in cash, no small feat when the sum was $1.5 million. The bigger problem was that the sister’s friend, like many wealthy Argentinians, kept his savings in dollars in an American bank account. 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 get around this, the sister’s friend purchased $1.5 million worth of Bitcoins from Mt. Gox. Once the friend had the coins, he took his Bitcoin wallet to the signing for the apartment in Buenos Aires and transferred it over to the seller, with the notary as witness. Afterward, Wences’s sister sent him a picture of the two old men holding up their smartphones and smiling.

  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.

  The next two days were filled with panels covering topics like “eBay and Innovation” and “China: The Road Ahead.” In the afternoon there were scheduled activities: tennis, horseback riding, and clay-pigeon shooting, among others. During the interludes Wences was approached constantly by people who had heard the Sunday evening conversation or heard about it. LinkedIn founder Reid Hoffman pulled Wences aside to ask more, as did Michael Ovitz, the former president of Disney. During a hike on Wednesday afternoon, Wences spent the entire time explaining the concept to Charlie Songhurst, the chief of strategy at Microsoft. At night, many of the same people approached David Marcus. As the president of PayPal, he would have as informed a view as anybody on the viability of Bitcoin.

  “What do you think of this?” they asked him. “Is this real?”

  Marcus replied that he already believed in the idea enough to put his own money into it. They shouldn’t invest money they couldn’t afford to lose, he said, but it was certainly worth some investment.

  On Monday, the first full day of the conference, the price of Bitcoin jumped by more than two dollars, to $36, and on Tuesday it rose by more than four dollars—its sharpest rise in months—to over $40. On Wednesday, when everyone flew home, Blodget put up a glowing item on his heavily read website, Business Insider, mentioning what he’d witnessed (though not specifying where exactly he’d been, or whom he’d talked to):

  I was at a technology conference earlier this week, and the most popular topic of casual conversation was Bitcoin, the electronic currency invented and unleashed a few years ago.

  One of the things that’s most fascinating about Bitcoin, I have learned, is that it entrances fanatical conspiracy theorists, clear-eyed pragmatists, and diehard skeptics alike.

  Songhurst, the Microsoft head of strategy, who had learned about Bitcoin during his hike with Wences, wrote up a paper and circulated it among some of the most powerful investors in Silicon Valley, channeling Wences’s arguments:

  We foresee a real possibility that all currencies go digital and competition eliminates all currencies from non-effective governments. The power of friction-free transactions over the internet will unleash the typical forces of consolidation and globalization and we will end up with six digital currencies: US Dollar, Euro, Yen, Pound, Renminbi, and Bitcoin.

  The question then becomes, is Bitcoin viable if the government digital ledger systems are just as good? W
e think yes, for two reasons:

  1.There will always be transactions for which “official money” is less good than Bitcoin

  2.If you live outside the US, it is dangerous to have all your money controlled by a state where you have no rights.

  In three days, Wences had reached more powerful people than Bitcoin had in its previous four years of existence.

  DESPITE THE SURGE of excitement, the interest Wences was encountering was still far from uniformly positive. More than a few people in Arizona left unconvinced that the technology would work and survive government scrutiny. Much of this skepticism had the same root as the excitement, and that was Silicon Valley’s defining, and cautionary, experience with financial technology: PayPal.

  PayPal, of course, still existed, owned by eBay and run by Wences’s friend David Marcus. But what made people wary was not the current incarnation of PayPal, but instead the company’s early days, when it had ambitions to be something much bigger.

  PayPal had been founded back in 1998 by Peter Thiel and Max Levchin, among others. Thiel was an avid libertarian, who had wanted to use Levchin’s cryptographic expertise to fulfill the Cypherpunks’ dream of sending money through encrypted channels, between private individuals and in particular between mobile devices like the PalmPilots of that time. In early staff meetings, Thiel gave speeches that could almost have come from the Cypherpunk mailing list.

  “PayPal will give citizens worldwide more direct control over their currencies than they ever had before,” he said.

  PayPal grew quickly, but in 2001, as the company readied for an initial public offering, it hit roadblock after roadblock from lawmakers concerned about the possibilities for money laundering and other illegal activities. 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.

  In the month before the Arizona conference, Thiel himself had been poking around in the virtual-currency space once again, looking for projects that might take advantage of the blockchain, without getting too bound up in a currency that could piss off government officials. Chris Dixon, Wences’s conversation partner at that Arizona dinner, had also been agitating to get his firm, Andreessen Horowitz, to look at cryptocurrency startups and had been finding a receptive ear in his boss, Marc Andreessen.

  They had both found their way to the new company being created by Jed McCaleb, the original founder of Mt. Gox. 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.

  But both of these key Silicon Valley figures were also getting more comfortable with Bitcoin itself. The investment firm that Thiel had helped create with some of his PayPal riches, the Founders Fund, began talking with an engineer at Facebook who had founded an e-mail list for Silicon Valley insiders, dedicated to Bitcoin, about joining the firm to look for virtual currency investments.

  The growing openness to Bitcoin was helped along by Silicon Valley’s ballooning sense of self-importance in early 2013. With the Nasdaq composite stock index soaring, shares of Google at an all-time high, and startups selling for mind-boggling sums, many in the tech industry believed that they were going to be able to revolutionize and improve every element of modern life. Investors and entrepreneurs were cooking up ever more ambitious schemes involving virtual reality, drones, and artificial intelligence, alongside more quotidian projects, like remaking public transportation and the hotel industry. The PayPal founders were among the most ambitious, with Thiel advocating for floating structures where people could live outside the jurisdiction of any national government. Elon Musk, an early PayPal employee and founder of SpaceX, was aiming for the colonization of Mars. 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.

  CHAPTER 19

  March 2013

  At the same time that Bitcoin’s reputation was getting a makeover in Silicon Valley, the physical infrastructure of the Bitcoin network was also undergoing an extensive transformation.

  For much of the previous year and a half, the computing power underpinning the network had grown steadily, but slowly. Over the course of 2012 the amount of computing power on the Bitcoin network barely doubled. What’s more, everyone was still relying on basically the same technology—graphic processing units, or GPUs—that had been introduced back in 2010 by Laszlo Hanecz, the buyer of the Bitcoin pizzas. By the end of 2012 there was the equivalent of about 11,000 GPUs working away on the network.

  But even back in 2010 it had been clear that if Bitcoin became more popular there was a logical next step that would eclipse GPUs. An application-specific integrated unit, or ASIC, is a chip that is built to specifically accomplish just one task—an even more specialized computing unit than a GPU. 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.

  But designing and fabricating a new ASIC chip could cost millions of dollars, and take several months, requiring contracts with one of the five specialized chip foundries that produced virtually all the chips in the world. For most of 2011 and 2012 Bitcoins simply were not worth enough to justify this investment.

  But as Bitcoin’s price had continued to rise in the second half of 2012, a couple of enterprising engineers had thrown caution to the wind and begun racing to create the first ASIC chip dedicated to mining Bitcoins. The first entrant in the race was a company in Kansas City that went by the name Butterfly Labs. In June 2012 the founders announced that they would deliver specialized mining computers installed with custom chips in October 2012 and quickly sold $5 million of the machines on preorder.

  A few months later, when Butterfly announced that the release of its machines would be delayed, a young Chinese immigrant in New York, Yifu Guo, announced that he had created a company, Avalon, with a group of engineers in China, which was building its own Bitcoin-dedicated ASIC chips.

  Yifu, a shaggy-looking twenty-three-year-old, promised that each device would be able to do 66 billion hashes per second, compared with the 2 billion that a GPU card could do. What’s more, his chips required a lot less energy—and thus lower electricity costs—to do the work. The price for each machine? A cool $1,299.

  The process of putting the machines together, first in Beijing and then in Shanghai, and then shipping them to customers in the United States, proved to be more complicated than Yifu and his team anticipated. But on January 30, 2013, Jeff Garzik, the Bitcoin developer in North Carolina, posted on the forum pictures of the bulging boxes that DHL had just delivered and the gleaming silver box inside, built to do nothing but mint new 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.

  Over t
he next month and a half, as the rest of Avalon’s first batch of three hundred mining computers reached customers, the effect was evident on the charts that tracked the power of the entire Bitcoin network. It had taken all of 2012 for the power on the network to double, but that power doubled again in just one month after Yifu’s machines were shipped. At the same time, the network automatically adjusted the difficulty of the problem the miners needed to solve, to ensure the ten-minute gap between new blocks of Bitcoins. For people who had built up fleets of GPUs making a profit quickly became a lot harder.*

  A few other companies were making big promises about their own, specialized mining chips that they were working on. But the most aggressive project—and the one that revealed the most about the untapped potential that many saw in Bitcoin mining—was top secret and open to only a small elite. The company 21e6—shorthand for 21 million, the number of Bitcoins to be released—was created by Balaji Srinivasan, a Silicon Valley prodigy who had founded a successful genetics testing company from his Stanford dorm room. In the spring of 2013, Balaji was quietly assembling a team of top engineers to build a Bitcoin mining chip that would go beyond anything that had been contemplated before—rolled out in data centers built exclusively for the 21e6 machines. If the chips worked as promised they would mint money for investors. This was a simple enough proposition, and the price of Bitcoin was rising fast enough that it attracted interest from venture capitalists who were still queasy about tying their firms to Bitcoin. Both of the founders of Andreessen Horowitz, Marc Andreessen and Ben Horowitz, signed up to put some of their own personal money into Balaji’s project, as did several of the original founders of PayPal, including Peter Thiel and David Sacks. Soon enough, Balaji was closing in on a $5 million fund-raising round.