Bitcoin
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Meanwhile, the Financial Action Task Force issued warnings that digital currencies were being used to finance terrorist groups.40
The following morning, on December 12th 2010, Satoshi outlined some technical developments he had made. ‘I’m doing a quick build of what I have so far in case it’s needed, before venturing into more complex ideas,’41 he said.
That was the last public remark he would ever make.
He exchanged emails with certain Bitcoin developers for some months after that, before disappearing altogether. In one final email to co-developer Mike Hearn, who asked if he had retired permanently, Satoshi said he had ‘moved on to other things.’
Gavin Andresen, another of the early developers, was perhaps the closest to Satoshi. In September 2011 he said, ‘I haven’t had email from Satoshi in a couple months actually. The last email I sent him I actually told him I was going to talk at the CIA. So it’s possible that…that may have had something to with his deciding.’42
It’s easy to assume that Satoshi was fearful of government authorities. He saw what was happening to Assange and to Bradley Manning, and what had befallen the founders of other forms of ecash. It’s unlikely he wanted accusations of terrorism levelled against him. Even if they were unfounded, they could have ruined his life and the lives of those close to him. Whether it was WikiLeaks, the CIA or both that caused it, Satoshi had vanished.
The rise of Bitcoin
That July 2010 mention on Slashdot was a catalyst. More and more users flocked to Bitcoin over the following months. New operations sprung up to mine coins. Open-source development of the protocol continued.
At first, the price of a bitcoin remained flat at around six cents, but then it began to rise. In November, it touched 50 cents. The market cap of Bitcoin passed the one-million-dollar mark.
Across the net a growing number of people were developing the technology and ways to apply it. An escrow transaction took place, then an over-the-counter (OTC) transaction (securities traded in some context other than on a formal exchange are OTC). There was the first payment from mobile phone to mobile phone, a short sale, then a call option (a bet on the price to rise). In the fast-developing spirit of crypto coin humour, three 100 trillion Zimbabwe dollar notes were traded for four bitcoins each. A put option (a bet on the price to fall) was written and sold.
By February 2011, 5.25 million bitcoins – a quarter of the eventual total Bitcoin supply – had been mined. The price had reached parity with the US dollar. There was more publicity at Slashdot and Hacker News, and a buzz on Twitter. The Bitcoin website was struggling to cope with the new traffic. And a new website had opened up by which you could buy and sell drugs, using Bitcoin as a means of payment – the Silk Road.
As is often the case when a security gets a surge in publicity, Bitcoin reached a fleeting high. The following month its price fell 30%, but its international reach was growing. Markets for exchanging bitcoins opened up in the UK, Brazil and Poland.
In April 2011, Jerry Brito wrote in Time, ‘If it catches on, Bitcoin might pose a threat not just to governments, but to payment processors as well. And it’s a story that’s just getting started’.43 Bitcoin soon reached parity with the US dollar again, then the euro, then the pound. Its market cap exceeded ten million dollars. The two-and-a-half-month period from April to June 2011 saw spectacular gains. From an early April low of 60 cents the price rose to $32 in June. By November it had fallen to two dollars.
The criminals and hackers also moved in. A user by the name of Allinvain says he had 25,000 bitcoins (with a then equivalent value of US$375,000) stolen from his wallet. Some 600 account-holders at MyBitcoin had their balances stolen. Someone hacked into the administrator account of the bitcoin exchange MtGox and issued sell orders for hundreds of thousands of fake bitcoins, driving the price down from $17.50 to $0.01, albeit temporarily. Fraud concerning PayPal purchases of bitcoins meant that service was discontinued (although the connection with WikiLeaks may have been the real reason). The world’s third largest exchange, Bitomat in Poland, lost its wallet and, with it, 17,000 bitcoins they were holding for clients. The wallet had been stored with Amazon’s cloud computing servers and just ‘disappeared’.
New developments continued to spring up – a smartphone wallet, then an iPad app. A payment was made by near field communication – a form of radio communication between smart phones. The first decentralized mining pool, P2Pool, mined a block. August saw the first Bitcoin conference in the US, and the following November Europe had its first conference in Prague.
Overall, 2012 was a year of consolidation, development and relative quiet for Bitcoin. Its volatile price pattern – one of huge, quick gains, followed by long, drawn-out declines – continued. It more than tripled between November 2011 and January 2012 – then it halved again. The price now stood at $4. In late May 2012, a bullish trend drove the coins from $5 to $17, only for the price to fall to $7. There was another six-month period of flat trading, this time in the $12 range which ended in January 2013.
There was further technological progress and increased media coverage. New companies sprung up offering everything from mining hardware to Bitcoin debit cards to Bitcoin gambling.
In May, it was discovered that the FBI were following developments. According to a leaked report,44 they were worried about Bitcoin facilitating the sale of weapons and drugs (which it was doing).
The thefts continued. In March 2012 the largest theft of bitcoins to date would take place with over 46,000 stolen at the website hosting company Linode. Two more thefts in May and September took another 42,000 in total.
Despite these problems, Bitcoin moved further into the mainstream.
WordPress is the world’s most popular blogging system. It powers about one in every six websites in the world,45 including the likes of The New York Times, CNN, Reuters, General Motors, UPS, eBay, Sony and Volkswagen. On November 15th 2012, in order to open up WordPress to users in countries not supported by PayPal or other credit card companies, WordPress began accepting bitcoins.
2013: Bitcoin’s year
2013 would be the year of Bitcoin. From low to high, it rose over 100 times. The old June 2011 high of $32 was utterly shattered by February. By March, the market cap of Bitcoin now exceeded one billion dollars. And for a day in November, a bitcoin would be worth the same price as an ounce of gold.
But back in January, the island nation of Cyprus was in economic crisis.
The EU then announced bail-ins – anyone with deposits above €100,000 would have a percentage of their money taken (47.5% as it eventually turned out) in order to raise funds for the over-leveraged Cypriot banks. Fears that these bail-ins would become the template for banks elsewhere spread across an extremely jittery Europe. Money – a lot of it Russian – fled European banks and Bitcoin became a vehicle to escape capital controls, pushing its price north of $100 in March. At the climax of the panic, it hit $266, only to collapse to $70 a week later. Over the next six months, the range was flat around $100.
More organizations started accepting bitcoins. Venture capital began pouring into the sector, despite continuing criminal activity ranging from hacking to money laundering.
One notorious organization – the Texas Bitcoin Savings and Trust – was accused of being a Ponzi scheme. In court, its founder Trendon Shavers tried to argue that bitcoins are not real money to sidestep misappropriation-of-funds charges, but the judge ruled that ‘Bitcoin is a currency or form of money.’ In August, Bitcoin was also ruled a unit of account by the German Federal Ministry of Finance.
In October, after some three years of trying, the FBI finally managed to shut down the Silk Road and seized some 27,000 bitcoins. The expectation was that the bitcoin price would collapse – and that day it fell by about 30%. On the same day, the Bitcoin forums were hacked and users’ details stolen. Visitors to the site were greeted with cartoon images of missiles exploding as Tchaikovsky’s 1812 Overture played in the background.
But the
price immediately turned and set off a run that would take it to parity with gold.
One sub-corporation of China’s answer to Google – Baidu – started accepting bitcoins as payment. It seemed the Chinese were now speculating. The price broke to new highs above $263 per coin. A fortnight later, it had doubled again. There was a hearing in the US Senate entitled ‘Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies’. The next day the price doubled again, reaching an all-time high of $1,242. Bitcoin transaction volume was now exceeding that of Western Union Money Transfer.
It may have been Chinese speculation that drove the price up. It may also have been an enormous fraud at MtGox – as has recently been suggested.46 It is not yet known for sure.
The University of Nicosia in Cyprus began accepting bitcoins as payment for tuition – suggesting a connection between Cypriot bail-ins and Bitcoin’s price rise. Richard Branson’s Virgin Galactic followed suit, then the ecommerce site Shopify.
December 2013 saw a heist at another online black market – Sheep Market Place. Another blow followed. China’s central bank banned financial institutions from using Bitcoin. The price dropped 20%. Baidu stopped accepting bitcoins the next day. Ten days later, China banned Bitcoin transactions altogether.
Bitcoin’s dark period continued into 2014.
Russian authorities said, ‘Systems for anonymous payments and cyber currencies that have gained considerable circulation – including the most well-known, Bitcoin – are money substitutes and cannot be used by individuals or legal entities.’47 Russian law, they said, stipulated that the rouble was the sole official currency and that introducing any other monetary units or substitutes was illegal. Remember, post-Cyprus, a lot of Russian money came in to Bitcoin.
Meanwhile people were struggling to withdraw their money from the world’s largest Bitcoin exchange. MtGox was going under.
Being in the right place at the right time isn’t everything – the ignominious rise and fall of MtGox
MtGox was the world’s largest and best-known Bitcoin exchange.
It was originally founded in 2007 by Jed McCaleb – who Wired described rather disparagingly as ‘an unemployed computer hacker’ – as an exchange for the trading cards game ‘Magic: The Gathering’. Hence the weird name – MtGox is an acronym of ‘Magic The Gathering Online eXchange’. (It is not pronounced Mount Gox – but ‘em-tee-gox’ – as in ‘empty promises’, as someone wryly put it.) Initially, the site was only used for a few months.
In July 2010, McCaleb saw that seminal post about Bitcoin on the website Slashdot – the mention that would draw attention to Bitcoin to an audience beyond the handful of programmers developing the code at the time. McCaleb thought it looked like a good idea, and quickly turned the MtGox domain name he had lying around into an exchange for bitcoins.
The site became the portal for buying and selling bitcoins. But McCaleb lost interest and in March 2011 sold MtGox to the Japanese company Tibanne, run by Mark Karpelès.
By April 2012 it was handling some 70% of global Bitcoin trades. But, despite MtGox riding on the coat tails of the stratospheric rise of Bitcoin, it had always been dogged with problems – hacks, thefts, lawsuits, and clients complaining they couldn’t retrieve funds. In the spring of 2013, US regulators declared that Bitcoin exchanges had to comply with money-laundering laws. MtGox failed to do so and had three million dollars seized by the Department of Homeland Security.
In 2014, withdrawals were halted again, then started, and then halted. At one stage, so weak was trust in the exchange that the MtGox quoted bitcoin price was about a quarter of that elsewhere. People flew to Japan to demonstrate outside MtGox’s offices and try to get their money back. An extremely wealthy tech-millionaire told me that Karpelès had been on the phone to him asking for financial help.
On February 24th, Karpelès resigned from the Bitcoin Foundation. The following day the MtGox website was taken down, its Twitter feed was deleted, withdrawals were frozen and a rumour began circulating that some 744,408 bitcoins – over 350 million dollars’ worth – had been stolen. All you got when you visited the MtGox site was a blank screen. The next day there was a message that read:
Dear MtGox Customers,
In light of recent news reports and the potential repercussions on MtGox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.
Best regards,
MtGox Team
The following day another statement was issued:
February 26th 2014
Dear MtGox Customers,
As there is a lot of speculation regarding MtGox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues.
Furthermore I would like to kindly ask that people refrain from asking questions to our staff: they have been instructed not to give any response or information. Please visit this page for further announcements and updates.
Sincerely,
Mark Karpelès
Other exchanges were quick to distance themselves, declaring that the ‘tragic violation of the trust of users of MtGox was the result of one company’s actions and does not reflect the resilience or value of Bitcoin and the digital currency industry’. But many people had lost fortunes.
The BBC’s Robert Peston called it, a little hysterically, ‘Bitcoin’s life-or-death moment.’48 James Titcomb in the Telegraph said, ‘Bitcoin is under threat.’49 But this was not the failure of Bitcoin, it was the failure of one badly run company operating on the Bitcoin protocol.
I came across this post on Reddit by ‘mtreme’:
I want to start off by saying that I’ve been waiting for this moment for a while. I knew it was bound to happen sooner or later, as soon as we weren’t able to withdraw our coins from Mt. Gox weeks ago. I stupidly had my life’s savings in bitcoin, and when the price started to fall, I converted to dollars and watched the price plummet. I lost $357,000. Not to try to earn a bunch of sympathy or anything but this was not only my money but it was going to be my 5 year old son’s education fund which i took out of fidelity about 1 year ago to mess with bitcoins. I dont know what the fuck to do any more. I’m sitting here on reddit looking for comfort or just something but I don’t know what I’m going to do now at all. I don’t have shit to live for any more and the only thing I have left is just talking about it here I guess. I can’t express what I’m feeling right now. THat shit was just sitting there and I couldn’t take it out how could this whole shop just pack up and dissapear? I don’t know if anyone here knows the facts or whats going on but I want to or if you have any slighest shred of evidence that its possible they arent really gone please et me know here. if im never going to see my money again all of it im going to either kill myself which i dont want to do because i want to live even though i have nothing to live for now, except my son who is now completely fucked 50
Many positive messages of support followed.
‘Your son is not fucked, he still has his father. Hang on’ said one. ‘Kids tend to love fathers more than money. Stay positive, dude’ said another. ‘Sir, I would give anything, 357k, a million, every cent I’ve ever earned or will earn to have one more day with my dad. Be there for your son’ said a third.
That sad post articulates the misery many feel when they lose money gambling, speculating or investing. (I suspect that – as well as the opposite extreme emotion you feel at winning – is part of the reason so many professional speculators from Jesse Livermore to the present day have been manic-depressives.)
This kind of disaster is also rude capitalism at work. MtGox was badly run. It was at best out of its depth, and at worst a scam. If the rumours are true, how can anybody run a company and not notice 350 million dollars’ worth of its core product disappearing? My sym
pathies are with those who have lost money, very much so. But these kinds of losses will, hopefully, force participants in the future to act better.
If Bitcoin is to succeed, it needs good practice from companies operating in the sector. Failure – bad companies going under – is how you achieve that.
Other exchanges quickly appear to have improved their act as a result. Vault of Satoshi (not a company I am endorsing) is one example. Its manager, Adam Cochran, announced, not long after the bust of MtGox, that third-party audits were not enough: ‘At Vault of Satoshi we are proud to announce full proof of solvency and the publication of our cold wallet.’ (A cold wallet is a bitcoin wallet kept offline.) ‘Users can self validate both their balance and the overall reserves of the exchange by navigating to our security center and selecting “BTC Proof of Solvency”.’51
Herein, by the way, lies one of the problems with Bitcoin. As a form of cash, it has the problem that it is non-reversible. There’s no form of payment protection. That’s great for merchants, but risky for customers. How do you get your money back, if the merchant doesn’t want to give it to you? Escrow and other forms of payment protection can be built on Bitcoin – but then you’re back to third parties with all the associated costs and need for trust.
Such forms of protection are already being developed. Whether you choose them or not is up to you.
Meanwhile, as I write, MtGox is in legal proceedings.
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Nerds, Squats and Millionaires
I do think Bitcoin…has the potential to do something like change the world.
Peter Thiel, Co-Founder of PayPal