How Silicon Valley and Wall Street arrived at a new gold rus
Source: Digital Gold
How Silicon Valley and Wall Street arrived at a new gold rush called Bitcoin
A new book, Digital Gold, explores all of Bitcoin's big players across the globe.
For the last few years now, non-tech-oriented friends and family occasionally ask me: "So what do you think of Bitcoin?" My answer is nearly always the same: "It’s intellectually interesting, but not really practical."
Yes, the blockchain is a neat idea. But unless you’re regularly buying stuff on Silk Road copycats, or if you live in a country with currency controls, or if you’re a hardcore libertarian, I’ve yet to hear a good reason why Bitcoin makes practical sense for most people in everyday life. Put another way: it doesn’t yet have a clear killer app.
Will Bitcoin ever reach that level? I don't know. But I do know that today there’s a lot of very smart and very rich people who seem to think so. A few lines towards the end of Nathaniel Popper’s new book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money cogently articulates this sentiment.
As Popper writes:
Years earlier, Bitcoin had promised that it would spread its benefits to all its users, but by 2014 large chunks of the Bitcoin economy were owned by a few people who had been wealthy enough before Bitcoin came along to invest in this new system. Most of the new coins being released each day were collected by a few large mining syndicates. If this was the new world, it didn't seem all that different from the old one―at least not yet.
Popper deftly chronicles Bitcoin’s rapid rise from being an obscure computer science project in 2009 to attracting some of the biggest Silicon Valley and Wall Street names just five years later. Readers may be familiar with some of the elements of his work: aspects of this overarching narrative have come out in bits and pieces in his reporting in the New York Times during that last few years.
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Similarly, since 2012 I’ve reported on a number of elements in the Bitcoin world, and what I’ve seen amounts to a lot of hype, and a number of companies that have either collapsed under their own incompetence, or have been outright accused of fraud. Sure, a number of Bitcoiners have managed to make a sizeable chunk of change along the way―particularly when one bitcoin was trading for around $1,000 in early January 2014.
But I didn’t know the full range of the men (and yes, they’re all men) behind the evolution of Bitcoin.
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One of my favorite parts of Popper’s book is Bitcoin’s mythical origin story. While most focus on the elusive Satoshi Nakamoto―and yes, he addresses the Southern California man who turned out not to be him―Popper focuses on the first person to play with Bitcoin with Nakamoto, Hal Finney.
Finney, who passed away in 2014, exemplifies the explorer, rather than the profiteer. The middle-aged Californian was someone who was interested in technology for its own sake, and initially met the mysterious Nakamoto through a cryptography e-mail list. He also mined some of the first 50 bitcoins ever after corresponding with Nakamoto. (Listen to this great interview with Finney here.)
After some initial skepticism of the idea, Finney defended Nakamoto publicly, which earned him trust. After its creator, Finney became the first "peer" on the Bitcoin network.
As Popper writes:
Hal’s defense of the program led Satoshi to send him an early, beta version for testing. in test runs in November and December they worked out some of the early kinks. Not long after that, in January 2009, Satoshi sent the complete code to the list. The final software made some interesting tweaks to the system described in the original paper. It determined that new coins would be assigned approximately every ten minutes, with the hash function lottery getting harder if computer were generating more coins more frequently than that.
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But on Sunday evening the first transaction took place when Satoshi sent Hal ten coins to make sure that this part of the system was working smoothly. To complete the transaction, Satoshi signed off with the private key associated with the address where the coins were stored. This transaction was broadcast to the network―essentially just Hal and Satoshi at this point―and was registered in the blockchain a few minutes later when Satoshi's computers won the next round of the hash function lottery.
Reading about these early days in Bitcoin’s history reminded me of Ars’ own brief experiment in March 2014 with creating our own cryptocurrency, creatively named Arscoin, an effective clone of Litecoin (using a difference hashing algorithm than Bitcoin).
This scene creates a pretty magical and often-forgotten moment in Bitcoin’s history. It is from where all the other ludicrous cryptocurrencies have sprung. The decisions made in Nakamoto’s initial code set precise boundaries as to how many such bitcoins could exist, and the Bitcoin community is living with the ramifications of those choices today. Such limits don’t exist in the classic "fiat currency" world.
As we reported then, in the United States, new money is made (or managed) by the Federal Reserve System, which creates an elastic currency: the US dollar. The dollar is said to be "elastic," as the Fed can increase or decrease the money supply at any given time essentially by telling the Bureau of Engraving and Printing to simply print more money using fancy moneymaking machines and crazy-complicated inks and textiles.
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The Federal Reserve says (PDF) that the total value of currency and coin in circulation has risen from $31.2 billion in 1955 to $724.2 billion in 2003. Of course, when done unchecked, printing money can lead to hyperinflation. (Zimbabwe famously reached an inflation rate of 6.5 sextillion percent in mid-November 2008―it recently abandoned its local currency entirely.)
In the wake of the economic crisis of 2008, the Fed (and its counterparts in Europe, including the Bank of England) undertook a related practice called quantitative easing with the purpose of injecting more money into the economy. If you’re an anti-Fed libertarian, this is precisely the reason why the Bitcoin may be a panacea: it has crypto-based laws of nature.
As such, I’m sure that Finney and Nakamoto had no way to value what one Bitcoin was actually worth when they first started transferring them to one another back in 2009.
And you can mine them to buy fancy hats!
Similarly, that’s how I felt when back when we first created Arscoin. Like any cryptocurrency (or anything else for that matter), are worth whatever the market will bear. This is worth emphasizing: they’re worth whatever someone is willing to pay for them, whether it's $5, $500, or $5 trillion. One evening early in our experiment, I asked my wife what she would trade for 5,000 Arscoins. Her answer: "A kiss?" Boom! A market had been created.
Popper even reminds us of the amusing tale of how, back in May 2010, Laszlo Hanyecz, a programmer living in Florida, sent 10,000 bitcoins to another bitcoin enthusiast in England, who promptly ordered $25 worth of pizza for delivery to Hanyecz’ house. At current exchange rates, those 10,000 bitcoins are worth $2.3 million. (In March 2013, when Vice wrote up this story, those coins were worth $750,000.)
A “libertarian Indiana Jones”
In a way, the book is almost a blockchain of its own―a chain of people from whom the concept of Bitcoin generated from and has evolved into. While the opening of the book touches on Finney and then transitions into profiling the young programmer, Martti Malmi. The young Finn became one of Nakamoto’s early correspondents as well. In working with Nakamoto to create the ubiquitous Bitcoin logo, Malmi was the first outside of the enigmatic creator himself to touch Bitcoin’s source code.
Quickly, Popper moves on to touching on some of Bitcoin’s biggest celebrities: Jed McCaleb (the original founder of Mt. Gox, before selling it to Mark Karpeles), Ross Ulbricht (the now-convicted founder of Silk Road), Gavin Andresen (now the primary developer on the Bitcoin code), and others.
One of the most interesting people Popper profiles in his book is Roger Ver, who has been nicknamed "Bitcoin Jesus" for his sheer enthusiasm and evangelism of Bitcoin.
Ver has been covered briefly here and there in the pages of Ars: most recently we did a short story about how after having renounced his American citizenship, he couldn’t get back in to attend a conference.
Popper writes:
It was during a brief trip to California to see his family that Roger sat down to breakfast listening to a month-old Free Talk Live podcast on his iPod. When the hosts started talking about Bitcoin, something snagged in his mind and he stopped what he was doing. Many Bitcoin fanatics would later talk about their ecstatic moments of conversion to the Bitcoin cause, but few were as extreme as Roger’s. While the podcast was still playing, Roger did a search for Bitcoin on the laptop he had on his kitchen table and began making his way through everything he could find.
He was so entranced by the idea of a financial system outside the control of the government that he read clear through the night to the next day. After a short nap, he began reading again, and went on reading for a few days until he eventually felt so weak, and so gripped by a sickness taking over this throat, that he called a friend and asked to be taken to the hospital. There he was connected to an IV sack that pumped antibiotics and sedatives into him. It might have been the drugs, but as he lay in his hospital bed, he felt he had found a kind of promised land that he had been waiting for all of his short life―the Galt’s Gulch he had been searching for like a libertarian Indiana Jones.
Ver is someone who had strong libertarian leanings even before Bitcoin. His corporate bio on the hardware retailer startup that he founder when he was 20 (Memory Dealers) claims that he "concentrated his efforts on studying economics and moral philosophy, virtually reading every book available, including works by Adam Smith, Ludwig Von Mises, and Murray Rothbard."
Further Reading
Bitcoin investor who renounced US citizenship now can’t get back in
Roger Ver gave up US passport in favor of St. Kitts last year.
Three years later, Ver was sentenced to 10 months in prison after being convicted of federal charges of selling explosives on eBay. After he completed his probation in 2006, he left the US for good, settling in Tokyo.
Ver remains a committed libertarian, so much so that he donated over $150,000 to Ulbricht’s defense fund.
"If Ross is falsely accused and was not [Dread Pirate Roberts], then he deserves the best defense money can buy," Ver told Ars in July 2014. "Either way, he deserves the support of anyone who is opposed to the war on drugs."
Another fascinating character is Wences Cesares, an Argentinian entrepreneur who probably has the most compelling arguments as to why Bitcoin is not only intellectually interesting, but necessary.
As Popper writes:
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 so in 1985 the new peso was replaced by the austral, which was worth 1,000 new pesos. Seven years later, continuing inflation lead 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.
Of course, Bitcoin’s own trading value relative to the United States dollar has varied quite a bit too―topping over $1,000 per Bitcoin in early January 2014, while settling more recently at about $230.
Wences, a 41-year-old entrepreneur, now runs a venture-backed Bitcoin wallet startup called Xapo that "combines the convenience of an everyday bitcoin wallet with the security of a deep cold storage vault." The company is apparently working on a Bitcoin-based debit card as well but that has yet to fully come to fruition.
All in all, Digital Gold provides a well-written summary of how Bitcoin has gotten to where it is today. It doesn’t make any predictions or prognostications about Bitcoin’s long-term prospects, but intentionally or not, the book seems to suggest that Bitcoin is a snowball that will only get bigger and badder with time.
The book ends with a confrontation between Cesares and Bill Gates, who initially was a staunch Bitcoin skeptic. Gates has apparently tempered his views within the last year.
Still, after reading Popper’s history of Bitcoin, I personally remain unconvinced of its long-term viability as a means of everyday financial transactions. I come down on the Felix Salmon side―rather than the Ben Horowitz side―of the Bitcoin bet orchestrated last year by NPR’s Planet Money: "Five years from now, in January, 2019, we'll poll a representative sample of Americans. If 10 percent or more say they have used bitcoin to buy something in the past month, Ben wins. If it's fewer than 10 percent, Felix wins."
What did they bet? A pair of alpaca socks―and possibly the entire future of money as we know it.
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