Digital Gold

by Nathaniel Popper

  Among the people boarding the planes were the two founders of Bitstamp. Morehead had paid to fly them in from Slovenia and was hoping to finalize a $10 million investment in the exchange.

  Roger Ver was in from Tokyo and spent most of the weekend in a sweatshirt he had made with a picture of two honey badgers copulating. Roger also brought along Nic Cary, the young man he had hired to run Blockchain.info. Morehead was pushing Roger to sell part of his stake in Blockchain.info, which was coming to look increasingly valuable.

  Morehead had also roped in Neal Stephenson, the author of the science fiction book Cryptonomicon, which had popularized the idea of virtual currencies when it was published in 1999. Roger quickly got Stephenson set up with his first Bitcoin wallet, from Blockchain.info.

  Wences Casares couldn’t make the trip to Lake Tahoe—he was too busy closing the sale of Lemon—but his longtime collaborator, Micky Malka, made the journey. Jesse Powell, Roger’s old friend, had volunteered to drive up to Morehead’s house with a few people, so that, in the event that Morehead’s chartered plane crashed, there would be a few people left to continue leading Bitcoin.

  Once everyone was at Morehead’s house, the conversations predictably came back again and again to Silk Road. Few of the attendees were pessimistic about what Ross’s arrest would mean for Bitcoin. This seemed to many of them like the exact line in the sand that Bitcoin had needed to mark a division between its early, renegade years and its future in the mainstream. At dinner in Morehead’s enormous living room, Roger sat with Briger and Nejc Kodric, the chief executive of Bitstamp. The men placed their bets on where the price would be in a year. While Briger was somewhat cautious, betting that the price would fall to $120, slightly below where it was that day in October 2013, Nejc guessed that it would be thirteen times as much, or $1,300, and Roger was even more optimistic, guessing $1,320.

  CHAPTER 25

  October 2013

  The Cross Regions Plaza was an exemplar of the hastily built skyscrapers that littered the Shanghai landscape like so many gilded toothpicks. It had a lobby with gleaming marble floors and an entire wall covered by a leaping golden horse. But the elevator doors opened at each floor to reveal narrow, scuffed hallways reeking of smoke.

  Just across from a smoking closet and next to the Yu Cheng Vacation Club, suite 23N was a small office, but still too big for the tiny staff it housed. Amid a few whirring upright black fans, one of the few people tapping away at a desk was a boyish, bespectacled thirty-year-old programmer, Huang Xiaoyu, who had recently moved to Shanghai from Hunan, where he had been living with his wife’s family.

  Xiaoyu had founded China’s first Bitcoin exchange, BTC China, back in 2011 with the husband of his wife’s college roommate, Yang Linke, who handled the nontechnical aspects of the company. It was Xiaoyu, on the Chinese-language Bitcoin forum, who had given Bitcoin its Chinese name, three characters that were pronounced bee-te-bee, a play off the Chinese word for currency.

  Until recently Xiaoyu and Linke had run their exchange from opposite ends of the country as a sort of hobby, in time snatched from their real jobs. The small amounts of money moving into and out of the exchange went through the personal bank accounts of Linke. Nothing more was needed to sustain the light volume on the one and only exchange where Bitcoin could be bought and sold for yuan.

  That had all changed owing to the commanding presence in suite 23N—a thirty-eight-year-old man with a stout, penguinlike body, and a wide face with round curious eyes. Bobby Lee, who generally wore the same khaki pants and blue dress shirt day in and day out, alternated between flawless English and imperfect Shanghainese as he explained his vision for Bitcoin’s potential in the world’s most populous nation.

  WHEN BOBBY LEE had first reached out to the founders of BTC China in February 2013, he was much less well known in the Bitcoin world than his younger brother, Charlie Lee, the California-based Google engineer who had been involved in Bitcoin since 2011 and who was perhaps best known as the creator of Litecoin, one of the most successful alternative virtual currencies. It was Charlie who had pushed Bobby, and the rest of his family, to first look at Bitcoin back in 2011.

  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. When Bobby and Charlie roomed together in Silicon Valley, soon after college, Charlie had gotten Bobby into collecting gold coins and buying precious metals online. They understood cryptography as well as the importance of easily transferrable places to keep money.

  Bobby, though, was less of a programming whiz than his little brother and had spent much of his career as a manager. His jobs in the e-commerce divisions of Yahoo and Wal-Mart had afforded him a comfortable life in Shanghai, where he and his wife lived in a gated, manicured community of apartment towers. But after years of working for someone else, Bobby had developed a hankering, common among many older brothers, to run something himself. And Bitcoin looked increasingly attractive in a Chinese context.

  Bobby recognized that Chinese people would have little interest in the libertarian ideas of American Bitcoiners—decades of state-sponsored communism had killed most interest in ideologies. But after six years in Shanghai, Bobby believed that Bitcoin could have a unique, thus far untapped appeal in China. The most convincing evidence that it could take off was China’s previous experience with a successful virtual currency, Q coin, a digital money launched in 2002 by a Chinese online company. Q coin had started as a way to buy digital goods like greeting cards, but by 2006 Chinese people were buying and selling the coins themselves, bidding the price up. The frenzy did not stop until 2009, when the government stepped in and said that Q coins could be used only for their original purpose. To Bobby, it seemed that the main things holding Bitcoin back from becoming the next Q coin were the lack of good information about Bitcoin in Chinese and the lack of reliable places to buy coins.

  With this history in mind, in early 2013 Bobby had begun talking with his little brother about doing some sort of Bitcoin startup together. Charlie could do the coding and Bobby, as the more outgoing and confident brother, would be in charge. At the same time, to broaden his options, Bobby e-mailed the founders of BTC China. After using the exchange for many months, Bobby thought it had the potential to expand and improve. Within a few weeks of his first e-mail, plans were afoot to meet in Beijing, where the business-minded cofounder, Linke, lived. (Bobby had already become so excited about the prospect of working on Bitcoin that he turned down an offer to return to Yahoo.)

  Xiaoyu flew to Beijing from Hunan and Bobby came up from Shanghai. During a dinner at Quanjude, a restaurant famous for its Peking duck, Bobby put it to Linke and Xiaoyu simply: if they would be willing to make him the cofounder and chief executive of BTC China, he would invest his own money and go out and raise funds to expand the company. He also said the company had to be based in Shanghai, given his wife’s unwillingness to move from what she viewed as the most cosmopolitan city on the mainland. Bobby was not an easy person to say no to. He had a sincere demeanor that made it hard to doubt his honesty. His résumé also made it clear that he had about as many accolades as one could collect by the age of thirty-seven, including two degrees from Stanford and several years as an early employee at Yahoo.

  Neither of the two cofounders of BTC China spoke English well or knew how to run a company, and both had been overwhelmed by even the small amount of business they had attracted. Bobby, meanwhile, had the perfect unthreatening teacherly way needed to introduce a foreign and potentially scary new concept. He explained things in careful steps, never speaking down to anyone. By April the founders had struck a deal for Bobby to join them.

  A FEW WEEKS after Bobby signed his deal, Bitcoin had gotten its first major media exposure on the mainland, from China
Central Television’s Channel 2, which showcased just how immature the virtual-currency ecosystem was in China. The reporter for Channel 2 tracked down what he believed was the only place in the country that had accepted Bitcoins for purchase—an Internet café in Beijing, which had accepted its first Bitcoins at the urging of a young American expatriate living in the city.

  But while there wasn’t much visible activity in China of the sort that so many American entrepreneurs were pushing in the United States, there was quite a bit of work going on in the shadows. The reporter dug up a few young men who had set up fleets of computers with ASIC chips that were doing nothing but mining Bitcoins. Mining was a business that made sense in China, given the legions of tech-savvy youngsters and easy access to cheap electronics. But there was another, more systemic explanation for why the Chinese preferred less visible ways of acquiring their Bitcoins.

  Like Argentina, China had incredibly restrictive rules about moving money into and out of the country. But in China, unlike Argentina, these rules were not a response to runaway inflation, but instead part of the government’s effort to keep tight control over the exchange rate of the yuan, in order to promote the export economy. The authoritarian government also wanted to keep a close check on what its citizens were doing. Each Chinese citizen could move only the equivalent of $50,000 out of the country each year. As a result, it became difficult for wealthy people, including government officials, to get their riches out of China and into more secure foreign bank accounts.

  Living in Shanghai, Bobby saw how capital controls did not just make it hard for rich people to hide their money in other countries. 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. Money had poured into the Chinese real estate and stock markets, pushing both into elevated territories that many thought were unsustainable.

  Bitcoin presented an intriguing new investment that almost anyone with a computer could access. Bobby believed the Chinese would be all too willing to put their money into this unproved digital currency, despite the hazy legality—as the market for Q coins had demonstrated. Decades of communism had turned black markets into the norm.

  There was also a more suspect explanation for all of this behavior and for Bobby’s belief in his business. 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.

  OVER THE SUMMER, as the price of Bitcoin was stagnating, Bobby had raced to get his company set up for the next surge of interest. He went to the Bitcoin Foundation meeting in San Jose and looked for investors. In July he rented an office in Cross Regions Plaza, little more than a single room with two small conference rooms carved out with glass walls. The room looked down into the Shanghai National Stadium and out toward the hazy skyline sprawling into the distance.

  Bobby’s main focus was on striking a deal with the country’s two major online payment processors—the Chinese counterparts of PayPal—so that BTC China’s customers would have a way to get money into the exchange that didn’t involve the personal bank account of the company’s founder, Linke. The largest payment processor, Alipay, owned by the Chinese Internet giant Alibaba, was put off by the sound of Bitcoin, which it had not heard about before. But the smaller company, Tencent—not coincidentally, the creator of the old digital currency Q coin—was eager to provide something that Alipay didn’t and signed up with Bobby in September.

  In the United States, PayPal’s unwillingness to work with Bitcoin exchanges had been a major hindrance. Once Bobby got Tencent integrated into BTC China’s website in September, it was suddenly easier to get Bitcoins onto an exchange in China than it was anywhere else in the world.

  Bobby was not the only one who had spotted the potential appeal of cryptocurrencies in China. During the summer of 2013, the number of people downloading the basic Bitcoin software in China had regularly been second only to the number in the United States, and mining operations continued to grow. By September two other exchanges were up and running with a full-time staff. But BTC China was already doing twice the volume of the other exchanges in the country, and Bobby Lee didn’t intend to lose his early lead. He inked a deal to take a $5 million investment from Lightspeed Capital, the venture capital firm that had previously backed Wences Casares’s company Lemon. Shortly thereafter, as a promotional tool, BTC China marked China National Day by removing the 0.3 percent commission that customers had to pay on every trade. In China, unlike anywhere else in the world, it was now essentially free to trade Bitcoin.

  The real ascent in China began in mid-October, after the arrest of Ross Ulbricht, when a division of Baidu, the search engine giant and the fifth-most-visited website in the world, announced it would be accepting Bitcoin payments. A close look at the announcement revealed that it applied only to a tiny security service run by Baidu, Jiasule, but it gave Bitcoin a patina of legitimacy that it had so far lacked in China.

  In the week after the Baidu announcement, the price of Bitcoin moved up not just in China but around the world, from about $140 to $200, with the volume of trading climbing faster in China than anywhere else. On October 19, forty thousand Bitcoins changed hands on BTC China, nearly twenty times the number that had been traded on most days in September. In mid-October, BTC China saw the most volume of any exchange in the world during a few days—the first time that any exchange other than Mt. Gox or Bitstamp had held this record. It was evident that China was leading the price up because the price was rising faster in yuan than it was in dollars. In Shanghai, Bobby began furiously hiring people to try to fill the space in his still half-empty office.

  China was not the only source of momentum in the markets during this period. Many of the people who had attended Dan Morehead’s gathering in Lake Tahoe had traveled on to Las Vegas for the Money 2020 conference, the same financial-industry conference that Roger Ver and Charlie Shrem had attended the year before. When Charlie was there, only one Bitcoin company had been exhibiting, BitInstant. This time around, Bitcoin companies flooded the exhibition hall and there were three different panels dedicated to the subject.

  Then on November 3, the chief executive of eBay, John Donahoe, said in an interview with the Financial Times that PayPal was looking at creating a digital wallet that could eventually hold Bitcoins. After Donahoe’s comments came out, the price, which had been hovering around $215, began rising, and three days later it surpassed the previous record price of $267 that had been set on Mt. Gox during the April pandemonium.

  That same day, Bobby Lee was with his staff on a retreat to Shengsi Island. Much of the trip was spent trying to deal with the onslaught of new accounts and customer service requests. The pressure didn’t relent for the trip back the next day. Bobby’s exchange handled sixty thousand coins in one day for the first time ever, as the price leaped above $300 on Mt. Gox.

  During this period, BTC China was seeing more trading volume than any other exchange in the world almost every day, and the price in yuan was about 5 to 10 percent higher than it was on Mt. Gox and Bitstamp (when the exchange rate between the dollar and yuan was taken into account). On Saturday, with everyone still in the office, the price surged again, jumping from 2,100 to 2,500 yuan, or some 20 percent, in the course of a few hours. On the dollar exchanges the price was approaching $400. At the end of a nonstop weekend of work, Bobby sent an e-mail to motivate his staff:

  During the coming days, the market will continue to be super hot, and our workload will be non-stop.

  I urge everyone to stay focused, do our job, and keep up the hi
gh quality.

  Once the market cools down, with more normal trading volumes, then we can take a break and evaluate how things go.

  Everyone looked for reasons that could explain the continuing rise but, as is often the case in speculative markets, the upward moves seemed to be less dependent on outside events than they were on previous upward moves in the market. Bobby had guessed so many months before that the Chinese would want to bet on something that seemed to have momentum, and Bitcoin’s ascent was proving him right.

  In the midst of this, Bobby and his cofounders decided to do their part to increase the excitement by making a public announcement about the $5 million investment they had secured back in September and had kept quiet until now. Over the weekend of November 16 and 17, Bobby worked with his investor and a few news sites to prepare an announcement for Monday morning. When the story hit, the already rising price began to move that much faster, rising 15 percent in the course of a few hours, to a price that was already more than twice what it had been at the beginning of the month. But this was to be only the start of a very long day.

  CHAPTER 26

  November 18, 2013

  Several hours after Bobby Lee announced the $5 million investment in Shanghai, Patrick Murck, the general counsel of the Bitcoin Foundation, woke up in a hotel room in Washington, DC, and checked on Bitcoin’s rising price. After putting on his plain black suit and carefully attaching an American flag pin to his lapel, he left his room, carrying the testimony that he had been writing for the last few weeks and that he was about to present to the United States Senate.

  Since appearing at the private meeting with lawmakers back in August, Patrick had spent much of his time helping a staffer for Senator Tom Carper of Delaware, who wanted to hold a hearing on Bitcoin in the Homeland Security and Governmental Affairs Committee. A young aide, John Collins, had gotten excited about Bitcoin earlier in the year and had been holding private conversations across Washington about the technology. When Bitcoin took off in the fall, it helped Collins finally make the hearing happen.