Digital Gold

programmer, into giving him

lots of technical advice.

In addition to all this,

though, Ross’s ability to get

Silk Road up and running was

a product of his sheer

desperation at a difficult

moment in his life. Two years

earlier, Ross had abandoned

graduate

school—despite

having

already

published

several scientific papers—

because he wanted to do

bigger things with his life.

The first things he tried all

fell flat, including a used

book store he was running at

the time he put Silk Road

online. This had been one of

the first prolonged periods of

struggle in a life that had

otherwise

been

quite

charmed. Ross had movie star

looks

that

won

him

comparisons to the actor

Robert Pattinson, and he had

always had an easy time

making friends, attracting

women, having fun, and

grabbing brass rings like his

Eagle Scout badge and the

graduate school fellowship.

His failures after leaving

graduate school had led him,

by late 2010, to a crisis of

confidence

in

which

he

turned away from his friends

and broke up with his

girlfriend for a spell.

“I felt ashamed of where

my life was,” he wrote in the

digital diary he kept on his

laptop. “More and more my

emotions and thoughts were

ruling my life and my word

was losing power.”

Silk Road was, in some

sense, a last heave—a Hail

Mary in the parlance of

Ross’s

football-mad

hometown. By the time he

got it open in late January, he

had, by his own accounting,

gone through $20,000 of the

$30,000 he had to his name.

When Silk Road finally

opened up to anyone with a

Tor web browser it was a

simple site, with pictures of

Ross’s mushrooms next to

their price in Bitcoin. At the

top, there was a man in a

turban riding a green camel,

which would come to be the

site’s

trademark

image.

Within days, a few people

signed up, and the first orders

came

in

for

Ross’s

mushrooms. Soon thereafter,

the first vendors joined in,

offering to sell their own

illegal wares. By the end of

February,

twenty-eight

transactions had been made

for products including LSD,

mescaline,

and

ecstasy.

Ross’s growing confidence

was evident from a message

he posted on the Bitcoin

forum from his new screen

name: silkroad.

“The general mood of this

community is that we are up

to something big, something

that can really shake things

up. Bitcoin and Tor are

revolutionary and sites like

Silk Road are just the

beginning,” he wrote on the

forum.

In his own diary, Ross

was more frank: “I am

creating a year of prosperity

and power beyond what I

have

ever

experienced

before.”

CHAPTER 7

March 16, 2011

The response to Silk Road

on the Bitcoin forums was

initially somewhat tepid—

only a few people chimed in.

But it got much more

attention on the most widely

used message board for

hackers—4chan—and

new

Silk Road members were

soon pouring in, along with

orders. By mid-March, the

site had over 150 members.

That was, in fact, more than

Ross was equipped to handle.

He had to return again and

again to the friend who had

been helping him with the

code, to figure out how to

deal with all the traffic. When

the site went down on March

15, he chatted his friend

Richard Bates in a panic.

“i’m so stressed! i gotta

get this site up tonight,” Ross

wrote.

“I’m not sure how this

stuff works,” Richard wrote

back.

“i wish i did,” Ross

responded.

One of the people who

visited the site while it was

temporarily offline was the

host of a popular libertarian

radio

program

in

New

Hampshire, Free Talk Live,

who was broadcasting live at

the time. Ian Freeman and his

cohost had been introduced to

Bitcoin earlier in the year by

Gavin Andresen, a regular

listener who thought the show

could reach an audience that

would be sympathetic to

Bitcoin. At a lunch with

Gavin, the hosts of Free Talk

Live had shown interest, but ultimately

went

away

unconvinced. Who was going

to have an incentive to use

this? they asked. Their views,

though, changed dramatically

less than two months later

when they learned about Silk

Road.

“All of the sudden my

interest has been piqued,”

Freeman said on the air.

Freeman and his cohosts

did their best to explain how

Bitcoin

and

Silk

Road

worked and they debated the

possibility that Silk Road was

a trap set up by the CIA. But

the hosts agreed that Silk

Road was something utterly

new, harnessing Bitcoin to

enable a type of transaction

that was, for all intents and

purposes, not possible before

—an online drug purchase.

What’s more, getting cocaine

or LSD delivered to your

home—or a rented mailbox—

seemed highly preferable to

meeting a sketchy dealer at

some dark rendezvous.

When Freeman tried to

get on Silk Road while he

was on the air, and found it

was down, he wondered if it

had all been a mirage. But

when he had been on the site

shortly before, he had seen

151 registered users and 38

listings.

Someone

had

recently delivered ecstasy

tablets from Europe to the

United States, taped to the

inside of a birthday card.

Here was something that

could take advantage of

Bitcoin’s unique qualities and

help it grow.

“This could be the killer

application

for

Bitcoin,”

Freeman said.

When Ross learned about

the broadcast a day later, he

had gotten Silk Road up

again, and he wrote to his

friend Richard Bates with a

mixture of fear and pride.

“my site had a 40 minute

spot on a national radio

program,” Ross wrote in a

chat session with Richard.

“friggin crazy, you gotta

keep my secret buddy,” Ross

added.

“I haven’t told anyone

and I don’t intend to,”

Richard wrote back.

“i know i can trust you,”

Ross responded.

ONE OF THE many listeners

who heard the conversation

about Silk Road on Free Talk

Live was Roger Ver, an

American entrepreneur living

in Tokyo, just a few miles

from Mark Karpeles.

In comparison with many

Bitcoin aficionados, Roger

had a rather happy upbringing

in the Bay Area, where he

grew up with one sister and

two half brothers. He had

been a natural at the strategy

game Magic: The Gathering

—so good that he traveled on

an amateur circuit to play

competitively. But he was

also on a wrestling team, and

he and his brother both spent

many afternoons fine-tuning

their muscle cars—Roger’s, a

Mercury Capri; his brother’s,

a Mustang.

At the age of twenty,

Roger signed up to run for the

California state assembly as a

libertarian candidate, vowing

never to take a government

salary. In the midst of his

campaign for the assembly,

federal agents arrested Roger

for peddling Pest Control

Report 2000—a mix between

a firecracker and a pest

repellent—on eBay. Roger

had

bought

the

product

himself through the mail and

he and his lawyer became

convinced

that

the

government was targeting

Roger because of remarks he

had made at a political rally,

where he had called federal

agents murderers. He would

be the only person arrested

for

selling

Pest

Control

Report 2000 through the mail

and the prosecutors showed

no leniency. Hit with felony

charges, he was sentenced to

ten months in prison after

agreeing to plead guilty.

The experience turned

Roger’s libertarian ideas from

a political cause to a personal

crusade—he

believed

the

government was out to get

him. In prison, Roger taught

himself Japanese, and the day

his probation was up he flew

to Japan to start a new life,

free from the United States

government.

Japan’s

orderliness appealed to him.

That and he had a thing for

Japanese women.

It was during a brief trip

back 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 his

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.

Roger had an intuitive

sense of the way markets

worked long before he had

developed his market-centric

ideology. When Roger was in

fifth grade, he cornered the

market on Lindy dollars, a

school-wide currency named

for a beloved teacher, after

realizing that a Lindy dollar

was not worth the same as a

real dollar, as most students

assumed. Using his Lindy

dollars, Roger bought up all

the Rice Krispies treats and

brownies at the school bake

sale and once there were no

other sellers, jacked up their

prices. The other students

quickly paid Roger’s prices,

realizing they had no other

use for their Lindy dollars.

Roger

launched

a

business, Memory Dealers,

during his first year at De

Anza College in Cupertino,

just after the tech bubble

burst,

when

bankrupt

companies began selling their

computer hardware cheap. He

scooped up all the hardware

he could find and sold it

online. The business became

so successful that he dropped

out of school after his first

year.

By

the

time

he

discovered

Bitcoin,

his

company

had

thirty

employees

and

sales

of

around $10 million a year,

which

paid

for

Roger’s

Lamborghini Gallardo and his

luxury apartment in Tokyo,

just a few blocks from the

flashing, teeming transit hub

and commercial district of

Shibuya.

In

April

2011,

after

hearing about Bitcoin on Free

Talk Live, he used his fortune

to dive into Bitcoin with a

savage ferocity. He sent a

$25,000 wire to the Mt. Gox

bank account in New York—

one Jed had set up—to begin

buying Bitcoins. Over the

next three days, Roger’s

purchases

dominated

the

markets and helped push the

price of a single coin up

nearly 75 percent, from $1.89

to $3.30.

At the same time that he

was

buying,

Roger

announced on the Bitcoin

forums that his computer

hardware company, Memory

Dealers, would immediately

begin accepting payment in

Bitcoin. Not long after that,

he turned a regular Memory

Dealers’ advertisement that

he paid for on Free Talk Live

into an advertisement for

Bitcoin and crowdsourced the

copy for the ad from the

Bitcoin forums. Soon enough,

he had put up a gold-and-

black billboard, on the side of

an expressway in Silicon

Valley, with an enormous

Bitcoin emblem and the

phrase “We Accept Bitcoin,”

over the Memory Dealers

web address. The crowd on

the forums went wild.

“God I love Bitcoin!” one

user wrote.

“We needed this,” another

said.

Roger

said

he

was

looking to do even more: “I

promise I’m doing whatever I

can to help make Bitcoin

succeed (Billboards, National

radio ads, etc.).”

Roger’s appearance on

the scene coincided with the

first

mainstream

news

coverage for Bitcoin, which

helped push the price up, and,

in

turn,

led

to

more

mainstream news coverage.

In the first such article, on

Time magazine’s website,

Jerry Brito, a fellow at the

libertarian-oriented Mercatus

Center at George Mason

University, was given space

to discuss why Bitcoin might

matter:

Law-abiding citizens

can carry on their

affairs without anyone

snooping on them or

telling them what they

can and can’t do.

Want to contribute to

WikiLeaks or some

other politically

unpopular

organization? No

problem. Live under a

repressive regime and

want to buy a

repressed book or

movie? Here’s how.

No wonder the

Electronic Frontier

Foundation calls

Bitcoin “a censorship-

resistant digital

currency.”

A few days later Forbes

magazine did its own lengthy

and positive story on Bitcoin,

noting

that

the

virtual

currency

“cuts

across

international boundaries, can

be stored on your hard drive

instead of in a bank, and—

perhaps most importantly to

many of Bitcoin’s users—

isn’t

subject

to

the

inflationary

whim

of

whatever Federal Reserve

chief decides to print more

money.”

Until

very

recently,

Bitcoin had been kept alive

almost entirely by computer

programmers

who

played

around with the Bitcoin

software themselves. Now it

was attracting a new breed of

participant, like Roger Ver,

who could not understand the

code, but for whom the

political possibilities behind

Bitcoin were enough of a

draw.

SATOSHI NAKAMOTO PICKED

this

moment

to

finally

disappear for good. The

author of the Bitcoin software

hadn’t posted to the forums

since December, but he had

continued to e-mail with a

select number of developers,

including Gavin, Martti, and

Mike

Hearn,

a

Google

programmer in Switzerland,

who got drawn into the

project after the WikiLeaks

blockade. In late April Hearn

politely asked how involved

Satoshi

intended

to

be

moving forward.

“Are you planning on

rejoining the community at

some point (e.g. for code

reviews), or is your plan to

permanently step back from

the limelight?” he asked.

“I’ve moved on to other

things,” Satoshi wrote back.

“It’s in good hands with

Gavin and everyone.”

A few days later, Satoshi

wrote a slightly peeved e-

mail to Gavin about an

interview he had recently

given to another online radio

show.

“I wish you wouldn’t

keep talking about me as a

mysterious shadowy figure,”

Satoshi wrote. “The press just

turns that into a pirate

currency angle.”

Gavin

wrote

back

acknowledging the point. He

also told Satoshi that he had

received from the CIA an

invitation to speak about

Bitcoin,

which

he

was

planning to accept.

“I hope that by talking

directly to them and, more

importantly, listening to their

questions/concerns, they will

think of Bitcoin the way I do

—as a just-plain-better, more

efficient,

less-subject-to-

political-whims money,” he

wrote.

Gavin

never

got

a

response and assumed that

Satoshi had been turned off

by the idea of Bitcoin

fraternizing with the most

intrusive arm of the American

government.

Satoshi’s final e-mails

went to Martti, whom Satoshi

asked to take full ownership

of the Bitcoin.org website.

“I’ve moved on to other

things and probably won’t be

around in the future,” Satoshi

wrote to Martti, in early May,

before transferring the site to

Martti and disappearing into

the ether.

Martti took responsibility

for the site, but he had

otherwise

almost

entirely

stopped his work on Bitcoin.

With the price rising, he sold

more than half of his twenty

thousand or so Bitcoins and

bought

himself

a

nice

apartment in Helsinki. Both

Martti and Satoshi seemed to

recognize that the community

had grown large enough that

it no longer needed either of

them.

THIS WAS THE moment that

many early adopters had been

waiting for. Bitcoin was

getting mainstream attention

and being taken seriously by

important people. By mid-

May, the price of a single

Bitcoin was approaching $10.

Thanks to Silk Road,

Bitcoin was being regularly

used for the first time as a

medium of exchange for real,

if illegal, things. This was not

enough to allow Bitcoin to

claim the mantle of money,

which had several properties

that Bitcoin lacked. But

Bitcoin could now meet some

definitions of a currency, a

label that had been purely

aspirational through 2009 and

2010.

“My wife isn’t calling it a

‘pretend

money

project’

anymore,” Gavin told the

others gathered on the Bitcoin

chat channel one morning.

But Gavin didn’t let this

go to his head. He avoided

the urge to buy Bitcoins and

speculate on their rising price,

as everyone else seemed to be

doing. He had promised his

wife that while he would

spend his time on the project,

he would never spend any of

the family’s money. At this

point, it was also evident to

Gavin that the price and

power of Bitcoin were no

longer reliant just on the

strength of the underlying

Bitcoin

protocol.

People

moving into and out of the

virtual currency were using

services that people had built

on top of the protocol, and it

was quickly becoming clear

that these services were not

equipped to deal with the

rapid growth.

In Tokyo Mark Karpeles

had to rush home from his

honeymoon with his new

Japanese wife—whom he had

met a few months earlier, not

at a bar, but in the office

building

where

he

was

working—to try to fend off

hackers who had launched a

denial-of-service attack on

Mt. Gox. The attackers said

they would relent only if

Mark paid a $5,000 ransom.

“This was—of course—

denied,” Mark explained to

his users. “We do not

negociate

with

internet

terrorists!”

But it took days for Mark

to

install

the

necessary

protections against what was

a fairly standard attack.

In Texas, Ross had shut

down his used book business

so that he could work on Silk

Road

full-time.

He

was

staying up late, furiously

trying to rewrite his site from

scratch so it would be able to

withstand both the traffic and

the hackers who were already

targeting him. Silk Road now

had over a thousand people

registered, ten times more

than it had just two months

earlier. In mid-May, to get the

new version online, Ross had

to shut the site down for a

few days, which turned into

one of the more stressful

periods he had endured.

“Updating a live site to a

whole new version is no easy

task,” he wrote in his diary.

“You don’t realize how many

little pieces lay on top of one

another so it works just right

(at least when you code

poorly like my amateur ass

was doing). So for about 48

hours it was stop and start on

the switch, but I finally got

there and it was working.”

While Silk Road was

down, the price of Bitcoin

entered a short period of

decline, suggesting just how

important the site was for the

fate of the virtual currency at

this point. Silk Road users

showed up on the Bitcoin

chat channel asking if there

was anywhere else they could

score some drugs. When Silk

Road came back online, the

price of Bitcoin picked up

again.

But the real onslaught

began on June 1 when the

gossip/news website Gawker

published an in-depth story

about Silk Road, based on

interviews with people who

had purchased and received

LSD and purple haze pot

from the site. There were now

340 different items available,

including tar heroin and

Afghani hash.

In the days immediately

after this story came online,

over a thousand new people

were registering for Silk

Road every day and the price

of a Bitcoin on Mt. Gox shot

up, crossing $10 for the first

time the day after the Gawker

story and $15 two days later.

The growth of the black

market was something many

of the old Cypherpunks had

wanted to enable by creating

an anonymous currency—in

the 1990s some of the

Cypherpunks had even talked

about a “Digital Silk Road.”

But now that it was actually

here, it was causing much

more mixed feelings in the

Bitcoin community. While

Martti had welcomed the site

and Roger Ver looked on

approvingly, many of the

Bitcoiners who were more

interested in technology than

politics thought this was the

worst thing that could happen

to the Bitcoin network. Gavin

tried to personally distance

himself and Jeff Garzik, a

programmer living in North

Carolina who had become

one

of

the

steadiest

contributors to the Bitcoin

software, wrote to Gawker to

explain that Bitcoin was

actually less anonymous than

most people believed, owing

to

the

record

of

all

transactions

on

the

blockchain.

Sure,

the

blockchain

didn’t

have

names, but Garzik explained

that

the

police

would

probably be able to determine

the identity of users through

sophisticated

network

analysis.

“Attempting major illicit

transactions

with

Bitcoin,

given

existing

statistical

analysis techniques deployed

in

the

field

by

law

enforcement,

is

pretty

damned dumb. :),” Garzik

wrote.

In

conversations

with

other developers, Garzik was

less worried about Silk Road

users getting caught and more

concerned

about

all

the

negative attention that Silk

Road would bring if it

continued to grow. The worst

fears of people like Garzik

were borne out on June 5

when

Senator

Chuck

Schumer of New York held a

heavily

covered

news

conference, at which he

decried the brazen business of

Silk Road and called for

prosecutors to shut it down.

He described Bitcoin as an

“online

form

of

money

laundering used to disguise

the source of money, and to

disguise who’s both selling

and buying the drug.”

Rather

than

scaring

people

away,

Schumer’s

commentary—and the deluge

of media attention it received

—brought on yet another

surge of interest, sending the

price of Bitcoin on an Icarus-

like rise that had it at $30

within two days. That was a

600 percent rise from a month

earlier, and a 9,000 percent

increase from six months

earlier. Silk Road now had

ten thousand members.

Ross had, by now, fully

recouped

his

initial

investment—earning $17,000

from

the

sale

of

his

mushrooms,

and

$14,000

from commissions collected

on the sales made by others.

But

the

news

out

of

Washington strained Ross’s

already frayed nerves.

“I was mentally taxed,

and now I felt extremely

vulnerable and scared,” he

wrote in his journal. “The US

govt, my main enemy was

aware of me and some of its

members were calling for my

destruction.

This

is

the

biggest

force

wielding

organization on the planet.”

When Ross shut the site

down in mid-June, to take a

breather, he wrote on the

Bitcoin forums that his little

experiment had claimed way

too much attention: “We’ll do

our best to get out of the

spotlight and hopefully the

merits of Bitcoin will become

the focus.”

But for regular Bitcoin

companies,

the

situation

wasn’t going much more

smoothly. Around the same

time Silk Road went down,

Mark Karpeles found himself

unable to process withdrawals

from Mt. Gox for four days.

The problems helped pull the

price of Bitcoin down almost

as quickly as it had gone up.

But even as the price settled

down, below $20, something

in the air was different. Some

of

Bitcoin’s

youthful

innocence seemed to be gone.

Just a few months earlier

—and even a few weeks

earlier—the forums and chat

channels had felt like a cozy

global community. All the

main characters could be

found online talking to each

other at almost any hour.

Now, everyone was too

busy to chat, or was put off

by all the negative energy.

Mt. Gox users were on the

forums complaining about

Mark’s

silence

as

his

exchange struggled and trades

got delayed. In the chat

rooms,

a

few

upstart

exchanges

that

were

attempting to challenge Mt.

Gox slammed Mark and his

maintenance of Mt. Gox.

There

were

a

growing

number of signs that Mark

was indeed falling behind. In

May he had hurriedly decided

to move Mt. Gox into an

expensive office tower, but so

far he had been able to find

only one employee who was

willing to take the risks

involved in working on

Bitcoin. Jed McCaleb sent

Mark suggestions for how to

improve the site but Mark

never responded.

Much of the tension in the

broader Bitcoin community

seemed to be a result of the

deluge of curiosity seekers

and

pranksters,

who

overwhelmed

the

chat

channel

with

inane

commentary. In June, over

15,000 new people joined the

forums, more than doubling

the membership and leading

to 152,000 new postings.

Bitcoin was supposed to

be a new kind of community

with no central authority,

powered by the people who

joined it. That had worked

until now because the people

involved wanted to see it

succeed. But what if the

people joining in had no such

interest?

Should

some

authority

figure

intervene

and, if so, who could it be?

Some of the leading

developers

working

with

Gavin

suggested

that

moderators

should

more

aggressively

police

the

forums and potentially even

move

the

forums

from

Bitcoin.org,

so

that

the

conversations on the forums

didn’t look as though they

had some official status

within Bitcoin.

Martti, who had been

given final say over the

websites by Satoshi, was

uneasy about these changes.

He said he had long avoided

determining what should and

should not be discussed on

the forum, as long as illegal

transactions

weren’t

happening on the forum itself.

Gavin largely stayed out

of the public debate—he

knew it wasn’t worth fighting

—but he quietly found a way

to move forward by creating a

mailing list dedicated to

Bitcoin

development

that

would be easier to control, a

move that did not go over

well with everyone.

Around the same time,

Gavin made his visit to the

CIA to present Bitcoin to a

conference

on

emerging

technology. He reported back

immediately to the forums

and was transparent about

what he had said during his

visit and what the response

had been (everyone at the

CIA meeting seemed to be

interested). Many people on

the forums were supportive of

his decision to make the visit,

but not everyone was. Those

debates, though, were quickly

overshadowed

by

bigger

questions about whether the

people

building

this

community had the skills to

keep it growing.

CHAPTER 8

June 19, 2011

The Tokyo sky outside Mark

Karpeles’s window was still

dark when the iPhone on his

bedside table jolted him

awake just after 3 a.m. Mark

was still trying to get his

bearings when he picked up

the phone. On the other end

was the panicked voice of his

friend William, a Frenchman

living in Peru who had first

introduced Mark to Bitcoin

back in 2010.

For the last few weeks,

William had been helping

Mark keep up with the

seemingly

irrepressible

expansion of Mt. Gox, which

had

grown

from

three

thousand users in March to

over sixty thousand users in

June. Just how little Mark

was prepared for the recent

growth was clear from what

William was trying to tell him

on the phone. Something

about the exchange’s servers

slowing down to a glacial

pace—and

the

price

of

Bitcoin plummeting from $17

to 1 penny in less than an

hour.

Suddenly

alert,

Mark

leaped out of the bed he

shared with his new wife and

ran to the home office in their

compact Tokyo apartment,

one floor up from the narrow

street.

Mark

was

not

generally known for moving

fast—most who met him

immediately

noticed

his

slothlike way. But once he

had

his

Mt.

Gox

administrative account up on

the screen, Mark wasted no

time in bringing the crisis to a

screeching halt. He shut down

the link between the Mt. Gox

website and his server and

moved Mt. Gox’s 432,000

Bitcoins—some $7 million at

yesterday’s prices—to a new

address that had a more

secure password.

These

moves

were

enough to stem the run on Mt.

Gox, but immense damage

had

already

been

done.

Hackers had enjoyed nearly

an hour to do their work,

while confused and terrified

Bitcoin users looked on.

Starting at around 2:15 in the

morning in Japan, the hackers

had

begun

selling

large

quantities

of

Bitcoins,

pushing the price down

dramatically.

“Everyone! Panic sell!”

someone wrote on the chat

channel, seeing the price

dive.

“Holy

fucking

sht,”

another wrote.

One user had the presence

of mind to record the charts

showing the decline and

narrate a video of it in real

time. Others, who had dollars

in their Mt. Gox account, saw

an opportunity and began

buying up the cheap Bitcoins.

The selling continued until

260,000

Bitcoins

were

purchased for $2,600 shortly

before 3 a.m. Japan time—a

99.94 percent discount from

their value just an hour

earlier.

After Mark had shut

everything down, he sat in his

dark apartment and began to

piece together what had

happened. The user logs

showed that someone had

signed

in

with

the

administrator account of Jed

McCaleb,

the

Mt.

Gox

founder who was still helping

Mark out. The computer

appeared to be in Hong Kong,

but it was likely the hacker

was porting in to a computer

there from elsewhere. The

Mt. Gox software enabled the

hacker to change the balances

in accounts and he created

over 100,000 new Bitcoins

out of thin air and put them in

a new Mt. Gox account.

These were not real coins on

the official blockchain; they

existed

only

in

Mark’s

accounting system. But that

was enough for the hacker to

begin using them on the Mt.

Gox exchange.

The hacker had clearly

planned in advance and knew

that Mt. Gox allowed users to

withdraw only $1,000 worth

of Bitcoins at a time. In order

to maximize the amount of

Bitcoins

that

could

be

withdrawn, the hacker began

selling some of the newly

created coins to push down

the price. As the price

dropped, it was possible to

withdraw more and more

Bitcoins under the $1,000

limit, until the relatively

primitive design of Mt. Gox

came to its rescue. As the

servers slowed to a crawl,

owing to the traffic created by

the

hacker,

withdrawals

suddenly became impossible.

By the time Mark got up,

most of the hacker’s Bitcoins

were still stranded inside Mt.

Gox, though hundreds of

thousands

of

coins

had

already been sold at distorted

prices.

It was not until an hour

after he first got online—and

two hours after the melee

began—that Mark posted any

kind of explanation to the

Bitcoin forums. At that point,

he gave the basics of what he

knew and said that the site

would be down indefinitely.

He

also

announced

his

intention to cancel all the

trades made with the Bitcoins

created by the hacker, a move

that drew an immediate

backlash from buyers, who

believed that they had gotten

thousands of those Bitcoins

on the cheap. Although many

expressed anger that Mark

was violating one of the

fundamental tenets of Bitcoin

—the

irreversibility

of

Bitcoin

transactions—Mark

could do so because trades on

Mt. Gox happened only

within the company’s system,

not on the actual blockchain

(Mt. Gox interacted with the

blockchain only when coins

moved into and out of the

company).

The

scope

of

the

questions

soon

expanded,

especially after it emerged

that the hacker had stolen a

copy of Mt. Gox’s customer

database, with everyone’s e-

mail addresses, and posted it

on the Internet. There was

bewilderment that Mt. Gox

administrators had needed

only a single password to log

in, not the multiple passwords

that most financial websites

required. And Mark’s system

had not checked on the IP

address and location of users

to look for abnormal activity.

“Frankly, we are fortunate

that our hackers have been

stupid and lazy so far,” Jeff

Garzik, the North Carolina

programmer, said to some

other developers.

On

top

of

these

programming mistakes, the

released customer database

demonstrated

how

few

measures Mark had taken to

stay

compliant

with

international rules designed to

stop money laundering. Mark

had just e-mail addresses for

most of his users, much less

than

financial

regulators

generally

expected.

Of

course, it wasn’t clear what

regulations Bitcoin would fall

under, if any. But there was

now real money flowing into

and out of Mt. Gox, making

the exchange an easy target

for government prosecutors if

they decided to look.

THE FIRST SIGN of any relief

for Mark came in an e-mail

that popped into his inbox

later that morning.

Hey Mark—

If you guys need

any physical help, I’m

available. I can be at

your office within 10

minutes.

I’m not sure what

I can do to help, but I

can help with phones

or emails or anything

you need for a day or

two until you get

things calmed down.

The e-mail came from

Roger Ver. From Roger’s

glass-walled

sixteenth-floor

apartment, in one of Tokyo’s

most exclusive residential

towers, he could see the

Cerulean Tower, where Mark

had recently set up Mt. Gox’s

offices. Since discovering

Bitcoin in April on Free Talk

Live, Roger had dedicated

many of his waking hours to

thinking up new ways to

promote the technology. In a

conversation right before the

crash he had said something

that would become a standard

line for him: “Bitcoins are the

most

important

invention

since the internet itself. They

will change the way the entire

world does business.”

At this point, though,

Roger knew that Bitcoin

relied as much on Mt. Gox’s

survival as on the Bitcoin

protocol itself, and he wanted

to make sure that Mt. Gox

would survive so that Bitcoin

could as well.

By the time Roger sent

his e-mail, Mark had driven

in his souped-up 2009 Honda

Civic from his apartment to

his new office. Mark quickly

connected with Roger on

Internet

chat—Mark’s

preferred

method

of

communication—and asked

him to come right over. He

needed people who could

speak

English

and

sort

through the thousands of

incoming

e-mails

from

confused customers.

When Roger showed up

at the bare-walled office, he

was an even more forceful

and impressive presence than

he seemed online. He had the

lean, muscular physique of a

wrestler, which is what he

had once been, and the buzz

cut and big smile of a

politician, which is what he

had once wanted to be.

What’s more, he came with

his Japanese fiancée, Ayaka,

and one of his employees

from Memory Dealers, whom

he put at Mark’s service.

Roger, on the other hand,

had to adjust his judgments of

Mark in the other direction.

Mark had the chubby look of

a big child and the nervous

crooked smile of someone

who

was

not

entirely

comfortable

with

direct

human contact. His wardrobe

was heavily reliant on T-

shirts

with

puns

about

programming languages. His

heavily

accented

English

made

him

difficult

to

understand. Mark’s only staff

member

was

a

young

Canadian

with

no

programming expertise who

had been hired a few weeks

earlier. Roger put all this

aside for the time being and

dived into the flood of

customer-support requests.

Roger brought an energy

unlike anything that Mark

had seen before. As he

plowed through complaints

and requests, Roger also

managed to convince an old

friend to get on a flight from

California to help the Mt.

Gox rescue effort.

Roger and the friend who

came to Tokyo the next day,

Jesse

Powell,

were

a

somewhat unlikely pair. In

contrast to Roger’s clean-cut,

buttoned-down

appearance,

Jesse had long blond hair and

had used money from his

startup to found an art gallery

in

his

hometown,

Sacramento. But Jesse and

Roger had met when they

were teenagers and both

playing the card game Magic

competitively. The strategy

game appealed to both young

men—and many of the other

youngsters who later found

Bitcoin—because they liked

the

idea

of

finding

unexpected

solutions

to

complex problems. Later on,

the same instinct had led both

of them to the martial art

jujitsu. A mixture of Japanese

and

Brazilian

influences,

jujitsu gained renown as a

way

for

smaller,

less

muscular people to disarm

and defeat larger opponents.

Libertarianism and Bitcoin

were alluring to Roger and

Jesse for much the same

reason,

owing

to

the

deceptively simple answers

they promised for much

bigger problems.

Roger had chosen his

apartment in Tokyo largely

because it was near his jujitsu

studio, or dojo, and during

Jesse’s visit to help at Mt.

Gox, the men went to the

dojo to grapple with each

other and let off steam. But

they spent almost all of their

time working through the

constantly growing pile of e-

mails that had been sent to

info@mtgox.com.

Mark, for his part, spent

these days silently parked in

front

of

his

computer,

investigating the cause of the

hack. He determined that the

attacker had gained access to

Jed’s Mt. Gox administrative

account by either guessing

the password with the brute

force of a computer program

or by gaming the system that

allowed users to create new

passwords. In the end, Mark

calculated that the site had

lost only a few thousand

Bitcoins, which he promised

to

reimburse

with

the

company’s money.

Mark then moved on to

rewriting the Mt. Gox code so

that he could reopen the site.

Two days after the crash, he

appeared briefly, via Skype,

on The Bitcoin Show, a

relatively

new

online

production created by an

enthusiast in New York.

Mark took the opportunity to

blame the code he inherited

from Jed McCaleb, which he

said had “a lot of problems.”

“The new system was

written from scratch with

absolutely no code from the

old system,” he said. “It was

made from state of the art

techniques.”

Two days after that, Mark

made a transfer of 424,424

Bitcoins that was visible on

the public blockchain, in

order to prove that he had his

customers’ coins.

“Ready guys?” he asked,

right before making the

move. “Don’t come after me

claiming we have no coins

after that.”

“Hopefully I’ll be able to

work without getting too

much disturbed after that,” he

said.

Roger and Jesse were

initially impressed by Mark’s

calm during the crisis. Every

day he sat quietly at his desk,

eyes fixed on the screen. But

as the week progressed,

Mark’s silence put him at an

uneasy distance from the

surrounding world. Jesse and

Roger grew concerned that all

Mt. Gox’s technological and

financial affairs were in the

hands of one person, with no

one else in a position to

question his decisions or

stand ready if things went

wrong. They also worried

about

Mark’s

ability

to

prioritize

tasks

properly.

They frequently noticed that

when Mark was supposed to

be working on fixing the site,

he was instead on the Mt.

Gox chat channel, trying to

address customer complaints.

At the end of the week, Roger

and Jesse asked what time

they should come in the next

day.

“Oh no,” Mark said. “We

can just start again on

Monday.”

“But this site isn’t even

back up,” Roger said. “I think

we should keep working until

we get it up.”

Mark

said

something

about the office tower being

closed during the weekends

and

shut

off

further

conversation. While walking

back to Roger’s apartment,

Roger and Jesse wondered at

Mark’s lack of urgency.

Mark

himself

worked

through the weekend, from

his apartment, and opened the

site for trading on Monday

morning. As soon as this

happened,

the

price

of

Bitcoins began falling. In the

week that Mt. Gox had been

closed, the public perception

of Bitcoin had taken a

decided turn for the worse,

with a series of news articles

suggesting that the hack

marked the likely end of

Bitcoin. The day after Mt.

Gox reopened, Forbes, which

had been among the first to

write

positively

about

Bitcoin, said that “it’s likely

to go the way of other online

currencies,” the first of many

public obituaries for Bitcoin.

CHAPTER 9

July 2011

In the weeks after Mt. Gox

got back online, it was

contending

with

new

exchanges that had been

started

during

the

busy

spring. But for the people

who stuck around Bitcoin

after the Mt. Gox attack, there

was seemingly no end to the

bad news.

In July, the founder of a

small

Polish

Bitcoin

exchange,

Bitomat,

announced

that

he

had

accidentally deleted the files

where he kept the private

keys to the Bitcoin addresses

at which his customers’

17,000 Bitcoins were stored.

The coins were still visible on

the blockchain, but without

the private keys, nothing

could be done with the coins.

This pointed to a danger

that was the flip side of one

of

Bitcoin’s

supposed

strengths. Satoshi Nakamoto

had designed Bitcoin so that

each user had complete

control over the coins in his

or her addresses. Because

only the person with the

private keys to an address

could

access

the

coins

assigned to that address,

governments

could

never

seize the coins and banks

weren’t needed to hold them.

This design also meant that

the coins themselves weren’t

stored on any particular

computer; if a computer

holding a wallet file with the

private keys crashed, the

coins were still on the

blockchain, as long as the

owner still had copies of the

private keys.

But the design also meant

that if a person lost the

private keys for a particular

address and had no backup,

there was nothing anyone

could do to access the coins

held by that address. People

were

already

taking

precautions to guard against

this, writing down the private

keys on a piece of paper or

maintaining

backups.

But

what if the piece of paper was

lost,

or

if

the

secure

document with the keys in the

cloud, as in Bitomat’s case,

was

accidentally

deleted,

along with its backups? Not

everyone, it turned out, was

good at keeping track of

valuable things.

Another incident just days

after the Bitomat losses

reminded everyone that the

companies holding customer

Bitcoins

had

another

vulnerability—the integrity of

the

people

running

the

companies. The losses this

time happened to customers

of MyBitcoin. The site, which

had been around for over a

year, provided a simple

online wallet and held the

private keys for all of its

customers, so the customers

didn’t have to worry about

losing keys.

In late July coins started

mysteriously

disappearing

from MyBitcoin wallets. The

founder of the site, a man

who called himself Tom

Williams, was unresponsive

and soon enough all the

wallets

were

frozen.

Customers realized that they

had no idea who Tom

Williams actually was. On the

forums, a group of users

formed a vigilante online

posse to try to hunt down

Williams, but after making

initial progress they lost the

trail. It quickly became clear

that Tom Williams, whoever

he was, had now disappeared

with everyone’s Bitcoins and

there was nothing anyone

could do to get them back. In

the

days

after

his

disappearance, the price of a

Bitcoin fell to $6.

THE SCANDALS AND steadily

declining price of Bitcoin

over the summer of 2011

drove away most of the

crowds that had been drawn

in when the price was

shooting up a few months

earlier. The future for Bitcoin,

a technology that relied on

maintaining the trust of its

users, seemed about as bleak

as it had ever been.

But

the

disappearing

crowds were a bit like a

receding tide. They exposed

what had been left behind and

it was not an altogether

disheartening

scene.

Yes,

there were fewer people, but

most

of

the

serious

programmers who had gotten

involved in Bitcoin earlier on

had stuck around.

For people like Gavin

Andresen and Jeff Garzik, the

problems at Mt. Gox and

MyBitcoin were evidence for

why a decentralized financial

network like Bitcoin was

needed. Both Mt. Gox and

MyBitcoin were centralized

companies and they failed

because of the amount of

power and money that had

been placed in the hands of

their operators. With Mt.

Gox, the hacker had needed

to get only one password to

access the entire system. And

because Mark kept tight

control over all the code for

Mt. Gox, his customers

couldn’t review the software

and chip in with suggestions

and improvements of the sort

that could have helped avoid

the

hack.

The

Bitcoin

protocol, on the other hand,

had been slowly improved

over time by all the people

looking at it, and had

continued

working

as

intended

throughout

the

various crises.

As the summer went on, it

was evident that Bitcoin had

not just kept its hold on the

experienced programmers—

all the excitement in June had

actually drawn the attention

of many new programmers,

who

understood

the

distinction

between

the

Bitcoin protocol and the

current

crop

of

Bitcoin

companies.

Mike Hearn, the British

engineer working in Google’s

Swiss offices, had created an

e-mail

list

for

Google

employees

interested

in

Bitcoin, and through the

summer of 2011 it had grown

to over a hundred people. On

the list, Google employees

conversed about the new

ideas and potential that were

contained within the Bitcoin

protocol.

One Google engineer in

the

company’s

Mountain

View headquarters, Charlie

Lee, sent Hearn a check for

$3,000 in exchange for a

batch of coins. At the same

time, Lee wrote to his family

with twelve bullet points with

reasons for giving it a look,

including:

• The whole system is

distributed and

decentralized. It’s a

peer to peer system. No

government can shut it

down even if Bitcoins

were outlawed.

• The system is self

sustaining. The miners

(i.e. p2p nodes) have

incentives to keep

mining, which helps

secure the whole

system. The more the

system is secure, the

more the users will trust

in Bitcoins and use

them. And the more

people use them, there’s

more incentives for the

miners.

• Everything is defined

by its source code and

it’s opened source.

Five or six other Google

employees began developing

new Bitcoin software to make

the network easier to access.

Mike and the other Googlers

were taking advantage of the

company’s policy of allowing

its employees to spend 20

percent of their working time

on non-Google experiments.

Mike used this time to

develop BitcoinJ, a codebase

that made it possible to work

Bitcoin into websites. This

was a significant step for the

virtual currency. Before this,

everyone who wanted to use

the system had to download

the Bitcoin software and a

copy of the entire blockchain.

That was, by now, a large

file, and its size made it all

but impossible to use Bitcoin

on a phone or anywhere other

than a home computer. Mike

was making it possible for

people to use Bitcoin without

actively participating in the

network,

something

that

would open it up to new

audiences with less technical

expertise.

The work caused some

disquiet

among

Mike’s

superiors at Google, who

feared that his work could

earn

Google

unwanted

scrutiny if the government

decided it didn’t like Bitcoin.

But he fought to keep

working on it, and won. And

not all the higher-ups were so

cold to the idea.

The head of Google’s

payments division, Osama

Abedier, called Mike in to get

a tutorial on the technology.

Mike knew that Google had

long struggled with how to

build

its

own

digital

payments

system.

The

program that Abedier was

working on, known as Google

Wallet, was not creating a

new

payment

system—

instead it was looking to

provide a new means of using

existing credit cards and bank

accounts online. All the fees

and restrictions with credit

cards and bank accounts still

applied to Google Wallet.

Mike gave Abedier a

lesson on the basics of a

virtual currency that had no

central

authority

and

essentially

no

transaction

fees. When Mike finished his

presentation, Abedier told

him, “I would never admit it

outside this room, but this is

how

payments

probably

should work.”

The Bitcoin developers

who were not at Google

generally

continued

their

work with no compensation

at all. For Gavin, who had

become the lead programmer

for the Bitcoin protocol, the

work had become a full-time

but unpaid job. He was

working out of the little office

he shared with his wife in

their Massachusetts home.

His desk chair was next to an

old radiator, which rattled in

the winter, and a window air-

conditioning

unit,

which

rattled in the summer.

The passion that Mike

and Gavin had for Bitcoin

had little to do with where the

technology stood in the

summer of 2011. After all, it

was still hard to actually buy

much

with

Bitcoins.

In

August, when someone came

up with a list of brick-and-

mortar

institutions

that

accepted Bitcoin, there were

all of five entries. The

programmers

were

also

acutely aware of flaws in the

Bitcoin software that would

need to be fixed if the system

were to grow.

But none of this distracted

the programmers from their

vision of what the Bitcoin

software could do in the

future. Some programmers

were focused on the idea of

micropayments, tiny online

payments

that

are

not

possible with credit cards

because of the minimum fees

necessary for a credit card

transaction.

Others were interested in

the

idea

of

immigrants

sending

money

across

international borders without

using Western Union. Some

imagined the sorts of smart

contracts that Satoshi had

described, which would allow

people to sell a house without

using expensive mortgage

title companies and escrow

services. Yet others had a

more abstract idea of a future

universal currency, as science

fiction had promised.

IN ADDITION TO the coders,

Bitcoin had kept its hold on

many of the believers who

were more interested in the

ideals behind the virtual

currency than the price. Over

the summer, this crowd got a

showcase on The Bitcoin

Show, the web-only television

show

created

by

Bruce

Wagner,

a

New

Yorker

whose

enthusiasm

compensated for his lack of

experience

producing

television and his lack of

knowledge about computer

programming. Early in the

summer, Wagner had begun

planning for what he was

calling

the

Bitcoin

Conference & World Expo

NYC 2011. He was not shy

about his ambitions for the

event, which he scheduled for

late August:

I know for sure

attendees are flying in

from every continent.

Some on private jets.

This will be

HUGE. No, definitely

not just another

Bitcoin meetup.

Major global press

—tv, magazines, and

newspapers, have

confirmed that they

will be here.

On the forums there were

questions

about

whether

anyone would show up. But

the list of people promising to

attend grew as the date

approached.

Roger Ver flew to New

York from Tokyo for the

conference and shared a hotel

room with Jesse Powell, who

came in from Sacramento.

Jed McCaleb flew up from

Costa Rica. Mark Karpeles,

consistent with his reputation,

decided to stay in Tokyo,

despite the fact that Mt. Gox

was the major sponsor of the

event.

Charlie

Lee,

the

Google engineer who had

purchased $3,000 of Bitcoin

from Mike Hearn, flew in

from

California.

Gavin

Andresen came down to New

York in a MegaBus that left

from a mall near his house in

Massachusetts. Gavin was not

the conference-going type,

but the bus ticket was cheap

and he couldn’t resist the

opportunity to meet all the

people

he

had

been

interacting with online for the

last year.

The conference was a

rather apt representation of

Bitcoin itself, with its odd

mixture of chaos, community,

snake oil, innovation, high-

mindedness, and enthusiasm.

While Wagner had initially

suggested that the whole

event would be held in the

rather run-down OnlyOneTv

studios, he ended up getting

space at the Roosevelt Hotel

in midtown Manhattan. The

room was the smallest one on

offer, a floor above the main

conference center, with low

foam-board

ceilings.

The

handful of exhibitors, who

had paid $130 to attend, were

given card tables to set up

their wares, just inside the

narrow entrance to the room.

Wagner had promised

three days of events, but in

the end there were only three

talks, taking up less than two

hours, and they got started

almost four hours late. Still,

once everyone was in the

room, there were almost a

hundred people, and they

buzzed

with

a

childlike

excitement at seeing these

characters

whom

they’d

known only as online avatars

before. The event began with

all

those

in

the

room

introducing themselves, both

by their screen name and by

their actual name.

The first speaker was

Gavin, who lived up to his

folksy

reputation.

He

recounted how he had learned

about Bitcoin, and explained

why he believed Satoshi had

chosen to put him in charge.

“You can call me an idiot

and yeah, whatever,” he said,

with a grin. “I know I’m not

perfect so I tend not to rush

into things rashly. Because I

screw up quite regularly, my

virtue is that I will listen to

you if you tell me I’m

screwing up.”

He gave a wish list of

things he wanted to work on

—focusing on security and

stability—and expressed his

desire to see Bitcoin become

“really boring” as it became

more useful.

After two other, more

technical speeches, the event

was closed with a brief talk

by Wagner, clad in a striped

black dress shirt and a striped

black sport coat. He seemed

to twitch with eagerness.

“I’m just so so excited

and honored to be here—to

witness this. I love you all.

It’s just so freaking awesome.

Right?” he said.

He had promised in the

run-up to the event that he

would “be making a HUGE

HUGE HUGE announcement

at the Conference. One you’re

all gonna be VERY excited

about . . . when you hear it.”

He built it up by first

announcing that there would

be another Bitcoin conference

in New York in October

2012. Then he said there was

going

to

be

a

Bitcoin

conference in Amsterdam in

June 2012. Finally he got to

the

conference

he

was

planning in Pattaya, Thailand,

only six months away.

“If that’s not enough,” he

said, there would also be the

first-ever Bitcoin cruise in

Brazil.

The audience sat silent,

with more than a few arched

eyebrows, as if to ask—“Was

that really it?” But Wagner

did not pick up on the

skepticism.

The crowd, though, had

not come for Wagner. The

attendees had come for each

other. And as the brief

planned

portion

of

the

conference concluded—after

a big group picture—the

conversation continued all

evening and all night, moving

to the Hudson Eatery, one of

three restaurants that Wagner

had

convinced

to

take

Bitcoin.

There, Roger Ver, the

Tokyo entrepreneur, talked

with the Google engineer,

Charlie Lee, who described

the computers that he had in

his garage, mining Bitcoins.

They were noisy, blowing out

heat, and had begun to annoy

Lee’s wife. Roger offered to

house

the

computers

at

Memory Dealers’ offices in

Silicon Valley.

Jesse

Powell,

Roger’s

friend who had helped out

during the Mt. Gox crisis,

found a kindred spirit in Mt.

Gox’s creator, Jed McCaleb,

who shared the same laid-

back, nerd-cool sensibility.

Jesse told Jed about his

experiences over the summer

in

Tokyo

with

Mark

Karpeles. And Jed told Jesse

about his recent ideas for a

new

cryptocurrency

that

would not require Bitcoin’s

energy-intensive

mining

process. Meanwhile, Gavin

was surrounded by people

offering to help with the goals

he’d set out in his talk.

Despite

his

aversion

to

crowds,

the

event

was

intimate

enough,

and

overflowed

with

enough

enthusiasm that even he got

into it.

The spirit in the restaurant

was no small part of what

was allowing Bitcoin to

survive.

A

project

that

seemed aimed at furthering

an even greater virtualization

and atomization of our world

was actually creating a sense

of real-world community with

people

working

together,

animated by a shared sense of

purpose for changing the

world.

The

community,

which mostly lived online,

wasn’t

always

this

harmonious.

But

it

was

possible, and the sense of

community was a significant

draw for a group of people

who didn’t always find it easy

to find like-minded people in

the ordinary world.

When it came time to pay

the bill, the waiter had little

idea of how to actually handle

the Bitcoins and it took over

an hour to get everyone’s

money transferred. But no

one much cared, or bothered

to

remark

on

the

cumbersomeness

of

this

supposedly

space-age

payment mechanism. It gave

everyone more chance to talk.

CHAPTER 10

September 2011

When Roger Ver returned

to Tokyo, he was immersed

in plotting his next big

Bitcoin campaign with a

twenty-six-year-old who had

marched up to him during the

conference in New York and

handed him a business card

that read, “I am friends with

Satoshi,” under the name Erik

Voorhees.

“We should talk,” Erik

had said to Roger.

With a confidence and

poise that were notable for

someone

his

age,

Erik

explained to Roger that since

learning about Bitcoin from a

Facebook posting just a few

weeks after Roger came on

the scene, he, Erik, had been

intently watching Roger’s

work online, cheering him on

from afar, and doing similar

evangelizing

for

Bitcoin

whenever he could.

Erik had recently moved

back to the United States

from Dubai, where he had

gone for a job in real estate

marketing after college. He

and his college sweetheart

had chosen to settle in a small

seaside

town

in

New

Hampshire, where they joined

the Free State Project, a

movement founded on the

idea that if several thousand

ardent

antigovernment

activists gathered in one

small

state,

they

could

influence

the

political

direction of that state. New

Hampshire was an obvious

choice, with its motto, “Live

free or die.” Free Talk Live, the radio show that had

introduced Roger to Bitcoin,

was hosted by other members

of the Free State Project.

Erik had grown up in the

mountain town of Keystone,

Colorado, where he had

become an adept skier and

mountain biker. In high

school, he learned to DJ,

playing house and techno

music at local parties. As an

undergraduate

at

the

University of Puget Sound, he

joined

the

Sigma

Chi

fraternity.

But he also had a more

serious, political side that he

got

from

his

father,

a

passionate advocate for free

markets and entrepreneurs

who had built his own

jewelry business. His father

had

been

a

competitive

debater and urged Erik to

follow in his footsteps, given

Erik’s smooth way with

words. Erik, though, had

discovered that he could not

convincingly argue a point he

did not believe in, and so he

threw himself into advocating

for the ideas he did believe in.

After the financial crisis,

Erik

became

particularly

fascinated by the role that

central

banks

played

in

maintaining

government

power. He came to believe

that it was only through

printing

money

that

governments were able to pay

for their budgets and wars.

Monetary policy had been

one of the issues he was most

passionate about when he

joined the Free State Project.

But when he discovered

Bitcoin, he saw a shortcut to

achieving his goal of a world

without government power.

Erik had largely abandoned

his efforts to find a new job

and went deeper into credit

card debt so that he could

spend his time evangelizing

for Bitcoin.

“You don’t have to try to

vote your way into changing

the world,” he would tell

anyone who listened. “If

Bitcoin works, then it will

change the entire world in a

decade, without asking for

anyone’s permission.”

Meeting Roger in person,

Erik immediately detected

that they shared more than

just basic libertarian politics.

They both occupied a more

idealistic

place

on

the

libertarian

spectrum,

less

interested in reducing taxes

and

more

interested

in

stopping

government-

sponsored wars—looking up

to the same thinkers who had

motivated Ross Ulbricht. At

the same time, neither Roger

nor Erik was the type of

anarchist-leaning libertarian

who fought against authority

figures

and

societal

expectations of all kinds.

Both men always looked

presentable—usually clad in

slacks and polo shirts—and

generally

approached

conversation with a respectful

and deferential tone.

At the conference, the two

men had commiserated about

the fact that even in the

libertarian

world,

where

Bitcoin should have had the

easiest time winning fans, it

had been slow going. Both of

them had run up against lots

of libertarians who doubted

the American dollar, but did

not see Bitcoin as a more

stable or solid alternative.

The problem for many

libertarians

was

their

ingrained belief that money

had

to

be

backed

by

something with real value,

like gold. One of the patron

saints of gold bugs, the

economist Carl Menger, had

argued that all successful

money

arose

from

commodities that had some

intrinsic value, even before

they become money. From

this

perspective,

Bitcoin

appeared to have no chance—

there was no independent

demand for these virtual

tokens on the blockchain. But

Erik argued that it was the

very virtual nature of Bitcoin

that made it so valuable.

Unlike gold, it could be easily

and

quickly

transferred

anywhere in the world, while

still having the qualities of

divisibility and verifiability

that

had

made

gold

a

successful currency for so

many years.

By the time they left New

York, Erik and Roger had

hatched a plan to start

winning over some of the

libertarian doubters. Their

goal was to get some actual

Bitcoins into the hands of all

of the fifteen thousand or so

people in the Free State

Project. Roger offered to

donate the coins himself. It

took some negotiations with

the board of the Free State

Project. Given its concern

about

privacy,

the

organization didn’t want to

hand over the e-mails of

members. But Roger offered

to send the board the coins so

that it could send the coins

out itself. To deliver the coins

—0.01 Bitcoin for each

person—Roger and Erik used

a new program that Erik had

been

developing

with

a

programmer he knew in

Colorado.

Part of the goal was to

show how Bitcoin could

allow transactions that were

not possible, or at best not

easy,

in

the

traditional

financial

system.

Roger

transferred his donation from

Japan to New Hampshire

without any fees or wait.

Meanwhile, the size of the

payments

sent

to

each

member was small enough

that the fees involved in

sending such a payment,

using PayPal or a check,

would have been greater than

the payment itself. On top of

that, the Free State Project

could send the money to its

members without needing any

personal

information—

showing that this was, indeed,

digital cash.

The whole thing was

worked out by the beginning

of October and, as part of the

deal, the Free State Project

began accepting donations in

Bitcoin. The announcement

from the Free State Project

made the board members

sound like converts: “Our

eyes are on the long-term, the

future, and Bitcoin is very

exciting for our project and

human freedom in general.”

BITCOIN HAD THE good fortune

of hitting hard times at a

moment when there was a

renewed

willingness

to

rethink the foundations of the

existing financial system.

On one side of the

spectrum,

the

2012

presidential campaign of Ron

Paul was gaining steam in the

fall of 2011, thanks in no

small part to his discussion of

the Federal Reserve and

monetary policy. He argued

that the central bank had

encouraged the real estate

bubble with low interest rates,

and had done more damage

by printing money after the

crisis hit. Around the time

that Erik was selling the Free

State Project on Bitcoin, Paul

likened the Fed’s money

printing to a drug addiction.

He warned that if it wasn’t

reined in, the central bank

would do itself in.

“The Federal Reserve will

close

themselves

down

eventually when they destroy

money,” Paul said on the

campaign trail.

Meanwhile, a month after

the

Bitcoin

conference,

protesters took over Zuccotti

Park in Manhattan and began

what

became

known

as

Occupy Wall Street, taking

aim at the government’s

decision to bail out the big

banks but not the rest of the

population.

The

Bitcoin

forum was full of people

talking

about

their

experiences visiting Zuccotti

Park

and

other

Occupy

encampments

around

the

country to advertise the role

that a decentralized currency

could play in bringing down

the banks. The people who

had been attending the New

York Bitcoin Meetup went to

Zuccotti Park with flyers and

cards offering an introduction

to Bitcoin. Soon enough, a

few branches of the Occupy

movement began accepting

Bitcoin

donations.

The

anticorporate

Occupy

sentiment was even more

widespread in the European

Bitcoin community, where

libertarianism had less of a

foothold. An anarchist bar in

a hip neighborhood of Berlin,

Room 77, had been one of the

first establishments to accept

Bitcoin and it became a

regular gathering spot for

many of the European Bitcoin

developers who were working

with Gavin Andresen.

The

different

communities where Bitcoin

was winning support were not

always in agreement about

what kind of future they were

working toward. For many

members of the Free State

Project and the Ron Paul

campaign, the problem was

the excessive role of the

government,

which

had

created

a

subservient

population that didn’t know

how to take care of itself. The

Occupy Wall Street crowd

was

often

OK

with

government, as long as it was

serving the interests of the

people, not of corporations

and banks.

But in the wake of the

financial crisis and the Iraq

War,

these

people

and

movements generally shared

a desire to take power and

resources back from society’s

ruling institutions and return

them to individuals. Both

Occupy Wall Street and the

Free

State

Project

were

ostensibly

leaderless

organizations that eschewed

new power hierarchies.

Political scientist Mark

Lilla has written about the

onset, after the financial

crisis, of a libertarian age, in

which the shared values are

“the

sanctity

of

the

individual, the priority of

freedom, distrust of public

authority, tolerance.”

These principles, Lilla

said, have been enough to

bring together

small-government

fundamentalists on the

American right,

anarchists on the

European and Latin

American left,

democratization

prophets, civil

liberties absolutists,

human rights

crusaders, neoliberal

growth evangelists,

rogue hackers, gun

fanatics, porn

manufacturers, and

Chicago School

economists the world

over.

Few things occupied the

common ground of this new

political territory better than

Bitcoin, which put power in

the hands of the people using

the technology, potentially

obviating overpaid executives

and meddling bureaucrats.

Not everyone in the

Bitcoin world partook in the

politicization

of

the

technology,

particularly

among the developers. Gavin

was generally sympathetic to

libertarian ideas, but he also

knew that some people did

get lucky advantages in life—

thanks to better educational

systems and family situations

—and it was these people

with built-in advantages who

tended to do best when

government went away. He

was

also

skeptical

that

political arguing did much to

change people’s beliefs. Jed

McCaleb, meanwhile, openly

chastised fellow Bitcoiners

for their emphasis on the

“libertarian, going to replace

all other currencies, take over

the world stuff.”

“That just turns people

off,” he said. “The only

important thing for people to

know is that it is better than

what people use now for

online payments.”

But the people ignoring

Jed’s advice ended up giving

Bitcoin momentum at a time

when

it

was

otherwise

lacking. Roger alone bought

tens of thousands of coins in

2011, when the price was

falling,

single-handedly

helping to keep the price

above zero (and establishing

the foundation for a future

fortune). As Erik would joke,

no one would be stupid

enough to invest in a project

as experimental as Bitcoin

without some noneconomic

motive for doing so.

“Who the hell is going to

put

their

money

into

something

so

completely

wacky?” Erik would say, with

a self-disparagement that was

somewhat unusual for such

an ideological partisan. “You

have to have an ulterior

motive.”

What’s more, at a time

when ideology was a major

national talking point, the

principles that were becoming

attached to Bitcoin were

helping it to win public

attention, as a symbol of the

new politics taking root in

America.

THE

IDEOLOGICAL

UNDERPINNINGS

of Bitcoin

helped it win new followers,

but the growing adoption of

Bitcoin was also serving as a

real-world test for these big

ideas—and it didn’t always

bear

out

the

hopeful

assumptions of the followers.

Bitcoin had succeeded in

its goal of giving its users

control

over

their

own

money, without requiring a

bank or any middleman to

conduct transactions. But all

the money that had piled up

in Mt. Gox and MyBitcoin

suggested that even among

the small group who had

chosen to buy Bitcoin, many

people were not actually

interested in having total

control

over

their

own

money. Even the firmest

advocates for Bitcoin’s self-

empowering potential, like

Roger Ver, were entrusting

coins to Mt. Gox and

MyBitcoin,

rather

than

holding the coins in their own

addresses. And they were

paying the price in lost and

stolen coins. This raised

questions

about

whether

people really wanted, or were

capable of taking advantage

of, the decentralization that

Bitcoin was offering. People

may have trusted the code

underlying Bitcoin, but they

didn’t

necessarily

trust

themselves to deal with that

code in the right way—and so

they turned to outside experts

to secure their money and

make it easily available.

Meanwhile, the services

that had become so popular in

the

Bitcoin

community

helped

explain

why

governments and centralized

authorities, like regulators,

were often granted power in

the real world. When people

entrust money to financial

institutions, they generally

don’t have the expertise or

time to make sure the

institution is doing its job. In

most cases, it is much more

efficient for people to band

together and pool resources to

ensure that their banks and

exchanges are on the straight

and

narrow.

Thus

were

created government agencies

like the Federal Deposit

Insurance Corporation, which

backs up American bank

accounts against losses, and

checks to make sure that

banks aren’t putting deposits

in danger.

Many libertarians and

anarchists argued that the

good in humans, or in the

market, could do the job of

regulators, ensuring that bad

companies did not survive.

But the Bitcoin experience

suggested that the penalties

meted out by the market are

often imposed only after the

bad deeds were done and do

not serve as a deterrent.

When it came down to it, in

each case of big theft, Bitcoin

users eventually went to

government authorities to

seek

redress—the

same

authorities that Bitcoin had

been designed, at least partly,

to obviate. Mark Karpeles

reported the Mt. Gox hack to

the Japanese police and

MyBitcoin users went to the

FBI’s cybercrime unit. Also

not surprisingly, the police in

these cases hinted that the

Bitcoiners had created the

mess and could clean it up

themselves.

CHAPTER 11

November 2011

Success was also testing the

big ambitions and grand ideas

with which Ross Ulbricht had

started Silk Road.

After

getting

overwhelmed by new users in

June 2011, he had brought the

site back online, but on a

more limited basis—with new

registrations

halted.

His

friend Richard, who had been

helping him write the site’s

code, asked him: “Have you

ever thought about doing

something

legitimate,

something legal?”

Ross,

in

fact,

had

considered alternatives, and

he began collaborating with

Richard

on

a

Bitcoin

exchange—not a silly idea

given the troubles that Mt.

Gox was having. They began

designing a prototype for

their exchange while Ross

continued running Silk Road.

In the fall, Ross was

forced to consider his options

seriously after a friend of his

ex-girlfriend—the only other

person who knew about his

involvement with Silk Road

—posted a revealing message

on Ross’s Facebook page:

“I’m sure the authorities

would be very interested in

your drug-running site.”

Ross immediately deleted

the post and unfriended the

woman who had posted it.

But he was terrified and went

over to Richard’s house to

talk with the only other

person who knew his secret.

“You’ve got to shut the

site down,” Richard told him,

after Ross had arrived and

explained

what

had

happened. “This is all they

need. Once they see this, they

can get a warrant and it’s

over. This is not worth going

to prison over.”

Ross told Richard that he

had, in fact, already sold the

site to someone else, but

Richard could tell Ross was

still very shaken. And there

was good reason for him to

be: Ross had not sold the site.

He lied to Richard as one part

of his effort to cover his

tracks. He was, in fact, still

firmly in charge of Silk Road.

Looking at the numbers

made it easy to see why Silk

Road was a hard business to

turn away from. In August

alone, the site had generated

$30,000

in

commissions.

There was so much business

that in September Ross hired

his first staff member to help

him out—a user of the site

who went by the name

chronicpain.

More was involved than

the money, though. Ross’s

site

was

actually

accomplishing the big things

he’d been dreaming about a

year before—fulfilling both

his ego and his ideals. On the

Silk Road forums, he was

able to give his grandiose

aspirations free rein:

“We’ve drawn a line in

the sand and are staring down

our enemies. Like it or not, if

you are participating here,

you are standing on that line

with us. This is not about

making money. This is about

winning a war. Look how far

we’ve come in 8 short

months. We are JUST getting

started.”

The notion that a site

dedicated to selling heroin

and forged passports was a

moral cause would seem to

many in the outside world an

exceedingly bold claim. But

for Ross, Silk Road was an

application

of

the

ideas

advanced by the philosophers

and economists whom Roger

Ver and Erik Voorhees also

loved—the ones who prized

freedom

above

all

else.

According to this moral code,

people should be allowed to

do anything they please as

long as it didn’t hurt others.

Freeing people from the

constraints that held them

back was an achievement of

the highest order, even when

all that it allowed was a

junkie to get his fix.

The emphasis on freedom

did not mean that Silk Road

was an entirely lawless place.

If a product, such as child

porn,

required

the

victimization

of

someone

else, it was banned from the

site—and

immediately

removed by Ross—following

the one rule that all the

anarchists and libertarians

tended to agree on. When

Ross created a category

called forgeries, there were

also limits: “Sellers may not

list forgeries of any privately

issued documents such as

diplomas/certifications,

tickets or receipts,” he wrote

on the Silk Road forums. But

documents

created

by

governments were fair game.

The success of Silk Road

was certainly offering Ross a

freedom unlike anything he

had experienced before. In

late 2011, he sold his pickup

truck and moved to Sydney,

Australia, where his sister

lived. All he needed for his

job was his Samsung laptop.

He would fit in his work

around trips to Bondi beach,

where he surfed and hung out

with a crew of friends he

quickly fell in with. As

always, his cool gravelly

voice and good looks made it

easy for him to meet women.

But he had, by now, learned

his lesson about discussing

Silk Road with anyone. When

people asked what he did for

a living, he would explain

that he was working on a

Bitcoin exchange. But for

someone involved in such a

bold

and

transgressive

enterprise,

Ross

was

a

surprisingly

fragile

and

sensitive soul. After a day of

walking around Sydney with

a girl he liked, just before the

New Year, Ross explained

how difficult his double life

was becoming in the one

forum where it was possible

—the diary on his computer.

“Our conversation was

somewhat deep,” he wrote of

his walk with the girl. “I felt

compelled to reveal myself to

her. It was terrible. I told her I

have secrets. She already

knows I work with Bitcoin

which is also terrible. I’m so

stupid. Everyone knows I am

working

on

a

Bitcoin

exchange. I always thought

honesty was the best policy,

and now I don’t know what to

do. I should’ve just told

everyone I am a freelance

programmer or something,

but I had to tell half truths. It

felt wrong to lie completely

so I tried to tell the truth

without revealing the bad

part, but now I am in a jam.”

It was, though, the norm

for Ross to fluctuate between

self-doubt and hubris. The

unusual combination seemed

to actually be one of the keys

to his success. His self-

reflectiveness led him to

question

everything

and

constantly rework his site,

while his confidence kept him

going when he got down on

himself.

Keeping his spirits up was

becoming easier in late 2011

because

Silk

Road

had

attracted a lively community

of users. Ross had also found

someone he trusted on the site

—a vendor on Silk Road who

became a staff member and

went by the name Variety

Jones. Ross described him as

“the biggest and strongest

willed character I had met

through the site thus far.”

Variety Jones, or vj, as Ross

referred to him, pointed out

flaws in the site’s design and

helped Ross figure out how to

fix them. More important, he

became a sort of confidant

and even a friend to Ross,

helping him think through the

best way to run the site, and

to feel less lonely.

When Ross was worrying

about the people who might

compromise

him,

Variety

Jones came up with a clever

idea: Ross could change his

name on the site from

silkroad to Dread Pirate

Roberts. The name carried a

swashbuckling panache that

Ross liked, but it also

provided something more

important: an alibi. In the

movie The Princess Bride,

Dread Pirate Roberts was a

name that was passed along

between

vagabonds.

This

could allow Ross to later say

that the job of running Silk

Road had been done by

different people at different

times.

“start the legend now,”

Variety Jones told him in a

chat.

“I like the idea,” Ross

wrote back. “goes along with

my captain analogy.”

Variety Jones also helped

Ross

hone

his

public

pronouncements on the site,

which never showed any of

the insecurity that Ross had in

his real life. In his “State of

the Road Address,” posted on

the Silk Road forum in

January 2012, Ross explained

that the site was “never meant

to be private and exclusive. It

is meant to grow into a force

to be reckoned with that can

challenge the powers that be

and at last give people the

option to choose freedom

over tyranny.”

If nothing else, Silk Road

was indeed providing a good

showcase for how anonymous

markets and decentralized

currencies could work in

practice. In early 2012 Silk

Road was still essentially the

only place where people were

regularly using Bitcoin to

make real online, anonymous

transactions—and the system

was working as well as the

Cypherpunks

might

have

hoped. Silk Road customers

were

regularly

sending

payments of thousands of

dollars—or

hundreds

of

Bitcoins—to vendors on the

other side of the world. In

early

2012

there

were

vendors in at least eleven

countries and many of them

were willing to send their

products across international

borders. All of this was done

using Bitcoin addresses and

private keys that did not

require either side to provide

any personal information.

There were essentially no

complaints on the site about

the Bitcoin payment system,

and many users who came for

the drugs grew to admire the

ways in which the virtual

currency

improved

on

existing payment systems. It

turned out that when the

incentives were high enough,

lots of people, even those in

altered states, could use

Bitcoin as intended. The only

occasional gripe was about

the volatile price of Bitcoin,

which made it hard to know

how much a vendor would be

charging a week later. But

Ross dealt with this by

creating a clever hedging

program

that

allowed

customers and vendors to

lock in a price.

Silk

Road

was

also

providing a demonstration of

how the market could work to

keep an unpoliced community

in check, even one where the

members of the community

went by screen names like

nomad bloodbath, libertas,

and

drdeepwood.

The

primary tool that brought

accountability

to

this

anonymous market was the

same

sort

of

feedback

mechanism used by eBay and

Amazon. When a customer

received a Silk Road product

through the mail, he or she

was

asked

to

rate

the

transaction on a scale from 1

to 5. Even if no one knew the

real name of a seller, the

reviews attached to a seller’s

screen name would allow

customers to determine if that

particular

vendor

was

trustworthy.

A

few

bad

reviews could sink a seller’s

business.

This

feedback

loop

created a remarkably engaged

online community in which

pot and heroin highs were

discussed with the same level

of

analytical

detail

that

Consumer Reports brought to

its toaster reviews. And it

injected accountability into

this apparently lawless land.

An academic study of Silk

Road later found that nearly

99 percent of all reviews gave

the maximum score of 5 out

of 5. This helped keep Silk

Road growing, from 220

vendors in late 2011 to

around 350 in March 2012.

The value of all sales in the

spring of 2012 was around

$35,000 a day. Ross was

taking between 2 and 10

percent of each purchase as a

commission, depending on

the size of the order. In

March, that amounted to

nearly

$90,000

in

commissions, collected in

Bitcoins.

There was, however, an

often unspoken irony in the

success of Silk Road, and of

Bitcoin for that matter. The

site and the currency, which

aimed to circumvent the

power of the government,

were

largely

built

on

technology that had been

created by the government or

through research sponsored

by tax money. The Internet

itself was an outgrowth of

several government research

programs,

and

the

Tor

network that served as a

backbone of Silk Road had

been created by the Office of

Naval Intelligence. Bitcoin,

meanwhile,

relied

on

advances in cryptography that

had been built thanks to

government funding. Ross

himself

had

gained

the

expertise

to

build

his

government-eluding site after

attending one of the best-

funded public high schools in

Texas

and

two

public

universities.

It

was

no

coincidence

that

these

technologies did not emerge

from a place with a weak

government

and

bad

educational

systems.

But

Ross focused on the wrongs

the government committed

and ignored the advantages it

had provided.

That same government

was, of course, not going to

sit

by

idly

while

the

technology was used to

support

an

online

drug

bazaar. Ross didn’t know it,

but in the fall of 2011 the

Baltimore office of Homeland

Security Investigations, or

HSI, the law enforcement arm

of

the

Department

of

Homeland

Security,

had

opened accounts on Silk

Road and began making

small-scale purchases. This

led federal agents, in January,

to the doorstep of a young

man in one of the poor

suburbs of Baltimore who

was known on Silk Road as

DigitalInk.

In

real

life,

DigitalInk’s name was Jacob

George and he had been

buying

drugs—including

methylone, bath salts, and

heroin

scramble—on

the

streets of Baltimore and

reselling

them

online,

becoming one of the most

popular vendors on Silk Road

after joining the site in July

2011.

After

DigitalInk

was

arrested in early 2012, he

immediately

agreed

to

cooperate with the police. His

record of Bitcoin transactions

provided

only

limited

information about the identity

of his customers, owing to the

lack of personal information

connected

to

Bitcoin

addresses. But it was a first

strand of loose yarn for the

officers to start pulling at.

And in March the HSI bureau

in Baltimore got approval

from local prosecutors to

form a task force, with other

federal agencies, that would

aim to burrow further into the

cryptographically

secured

drug bazaar. The task force

was given the name Marco

Polo in deference to the man

who explored the original

Silk Road and all the new

wonders it contained. A short

while later, the agents in

Baltimore

created

an

undercover

identity

for

themselves on Silk Road,

with the screen name nob,

and set out to build a

relationship with a man they

knew of only as Dread Pirate

Roberts.

PART TWO

CHAPTER 12

February 2012

After running away from the

United States government to

pursue his antigovernment

vision, Roger Ver had chosen

to live in a place that was

uniquely unreceptive to his

brand

of

antiauthoritarian

politics. Japan was a country

that was still deeply wedded

to traditional hierarchies with

an educational system that

taught its citizens from a

young age to obey authority.

This was evident in the

country’s

rigid

business

traditions—the bowing and

exchanging of cards—and in

the spiky-haired punks in

Tokyo, who waited patiently

for walk signals, even when

there were no cars in sight.

Roger had picked Japan,

not because it would allow

him to be around other like-

minded people, but because

he liked the orderliness of

Japanese culture—and the

women. He had met his

longtime Japanese girlfriend

at a gathering in California

and even she had almost no

interest in politics. As Roger

discovered, the deferential

culture made Japanese people

uniquely skeptical about a

project like Bitcoin that

aimed

to

challenge

government currencies. Japan

was the only place Roger had

encountered where people’s

response, when he described

Bitcoin, was to call it scary—

rather than interesting or silly.

This

was

due,

Roger

believed, to the way in which

the virtual currency broke

from

the

government’s

mandates about how money

should work. One of the only

people with whom Roger had

gotten any traction in Japan

was a local pornography

tycoon.

Luckily

for

Bitcoin,

Roger’s

job

and

wealth

allowed him to wander far

beyond Japan. In early 2011,

he commenced his effort to

renounce his United States

citizenship so that he would

not have to pay another dollar

of

taxes

to

support

a

government he considered

immoral. Japan, with its sense

of tradition and history, made

it almost impossible for

foreigners to gain citizenship,

so Roger made plans to travel

to Guatemala to start the

process

of

applying

for

citizenship there. He was also

traveling constantly for his

work with Memory Dealers—

looking for cheap hardware—

and everywhere he went he

would talk about his new

passion. While visiting the

Chinese manufacturing hub

of Shenzhen, he held the first-

ever Bitcoin Meetup in China

and paid for the group meal

himself. Whenever he ended

up in a taxi, he would set up

his driver with a smartphone

wallet and try to pay his fare

in Bitcoin. When Roger

began

looking

for

an

engagement

ring,

he

promised the online diamond

merchant BlueNile that he

would

buy

a

$50,000

diamond if the company

began

publicly

accepting

Bitcoin (BlueNile ultimately

demurred).

He

continued

using his own company,

Memory Dealers, to promote

Bitcoin by offering discounts

to people who paid with

Bitcoin, and by selling the

popular “physical Bitcoins,”

known as Casascius coins,

manufactured by a man in

Utah. Bitcoins, of course,

have no physical quality—

they are nothing more than an

entry on a digital ledger. But

the creator of the Casascius

coins printed the private key

for an unspent Bitcoin on the

inside of a hologram, attached

to a specially manufactured

coin

with

the

Bitcoin

emblem. A person could

spend the Bitcoin by peeling

off the hologram and using

the

private

key.

These

Casascius coins would later

become the most widely used

image of Bitcoins when news

organizations

needed

a

picture

of

something

to

accompany stories about the

virtual currency.

When Roger got into

conversations about Bitcoin,

he had a few stock lines he

would deliver, always with

the same crisp elocution and

conviction—almost as if he

were in a reverie.

“I’m pretty confident that

Bitcoin is the most important invention since the Internet

itself. The world is changing

because of Bitcoin right in

front of our eyes and it’s such

an exciting time to be a part

of this,” he liked to say. “I’ve

been spending just about

every

waking

moment

focusing on Bitcoin.”

Roger had always been a

good

salesman

in

part

because of his ability to

communicate

his

own

conviction, but also because

he had an intuitive sense for

what people wanted and

knew how to meet them at

their

level,

without

demanding agreement with

his beliefs. His pitch for

Bitcoin to the antigovernment

activists

emphasized

the

ability to buy drugs with

Bitcoin, even though Roger

himself was an abstainer who

had never smoked a cigarette.

When other Bitcoiners said

that Roger’s talk of drugs and

dodging taxes could tarnish

Bitcoin’s

reputation,

he

replied

that

he

always

adjusted his arguments to his

audience.

“If I was going on the

Oprah

Winfrey

show,

I

should

certainly

use

a

different

list

of

talking

points,” he explained on the

Bitcoin forum.

Roger, then, had the rare

resources and abilities to help

sell Bitcoin beyond the small

fringe communities where it

had so far been cloistered.

And he was dedicating his

life to doing just that. In

addition to the personal

pitches and purchases, he was

eagerly

supporting

any

companies he could find that

might help expand Bitcoin’s

appeal beyond libertarians

and heroin addicts. He gave

$100,000 to Jesse Powell, his

old friend who had come to

Tokyo to help out with Mt.

Gox. Jesse had been so struck

by

Mark

Karpeles’s

weaknesses that he decided to

start his own exchange. But

Roger’s

most

significant

investment early on would

prove to be the one he made

in a young New Yorker

named Charlie Shrem. Roger

had first seen Charlie talking

about

his

company,

BitInstant,

on

Bruce

Wagner’s The Bitcoin Show.

A small, cherubic twenty-

two-year-old, with a Brillo

Pad of curly hair and a slight

Brooklyn

accent,

Charlie

pitched BitInstant as the easy

way to get money into and

out of Bitcoin without wiring

funds internationally to Mt.

Gox’s bank account in Japan.

Roger quickly reached out

to Charlie by Skype, and

asked how much money he

needed. Charlie offered him

10 percent of the company for

$100,000. Roger sent over a

wire payment for $120,000.

THE YOUNG MAN Roger had

invested in was, outwardly,

an unlikely candidate to

become the entrepreneurial

leader in a futuristic global

movement like Bitcoin. He

had

grown

up

in

the

Midwood

section

of

Brooklyn, in a Syrian Jewish

community where all the kids

went to the same religious

schools. From early on,

Charlie had struggled with

social acceptance. He had

been born cross-eyed and,

after surgery to fix the

problem, had to wear thick

glasses.

He

was

almost

always the shortest one in his

classes. As with so many

other techies, Charlie’s real-

world struggles led him to

cultivate an active life online,

where he knew many of his

friends by their screen names.

But

a

surprising

confidence lurked beneath

Charlie’s anxious exterior. As

the oldest child and only son

in a family with four sisters,

he was treated like a prince

by his mother. He had

discovered that while other

kids could be difficult to win

over,

grown-ups

were

generally an easier audience.

He was the one kid at his

synagogue who would go up

and shake the rabbi’s hand

after services and his energy

and good spirit generally

appealed to adults. As he

grew up, he found his

personality

lent

itself

naturally to business, which

was highly valued in his

community and in his family;

his parents ran their own

jewelry businesses. When he

was a freshman at Brooklyn

College, he and a few friends

had founded an online deals

site, somewhat like Groupon.

He

blossomed

into

a

confident

salesman

when

pitching his ideas.

Charlie

had

initially

learned about Bitcoin through

an article about Silk Road. He

had gone on the forums and

found another user who was

thinking about launching a

deceptively simple startup: a

company that would make it

easier to get dollars into and

out of Mt. Gox. The man,

Gareth Nelson, lived in Wales

and had already programmed

a

prototype.

Charlie

confidently pitched what he

could bring to the project,

telling Gareth that he knew

people

at

PayPal—“very

high-up”—and would call to

get their support. In reality,

though,

the

first

people

Charlie got help from were

his parents. Still living in the

basement of his childhood

home in Brooklyn, Charlie

asked his mother if she would

be willing to give him a seed

investment. Charlie’s mom,

who ran the jewelry company

Bangles by Kelly, rarely said

no to her only son and didn’t

disappoint him this time,

transferring $10,000 to him.

Charlie was a departure

from the idealists who had

been

driving

Bitcoin

development so far. His first-

ever post on the Bitcoin

forum was not about the

power of decentralization but

an offer to sell JetBlue airline

vouchers for Bitcoins. Over

the next months he would

offer magazine subscriptions,

“Fuzzy Toe Socks,” and

throwing knives.

It

turned

out

that

Charlie’s willingness to throw

things at the wall, to see if

they would stick, was not a

bad thing at this point. The

idealists

who

had

been

driving the Bitcoin world

often got caught up in what

they wanted the world to look

like, rather than figuring out

how to provide the world

with something it would

want. The business model

being pursued by Charlie and

Gareth was designed with the

very practical aim of making

it easier for customers to get

Bitcoins than it was to get

them from Mt. Gox, which

required

wiring

money

overseas and placing orders

on the exchange. Just as

Charles Schwab dealt with

the

New

York

Stock

Exchange

so

that

its

customers didn’t have to do

so, BitInstant handled all the

dealings

with

Mt.

Gox,

making

the

process

of

acquiring Bitcoins faster and

easier.

Charlie’s swagger led him

to generate ideas, and act on

them, in a way that was still

unusual

in

this

young

industry. But his confidence

also came with a recklessness

that would become a liability.

On the Bitcoin forum, Charlie

advertised

his

love

of

marijuana and offered Silk

Road users help and advice.

Less publicly, he began

working with a Florida man

who helped Silk Road users

get Bitcoins to buy drugs.

Charlie was smart enough to

include a section on the

BitInstant site about the

company’s intolerance for

anybody

using

Bitcoin

illegally and he chose not to

advertise his own company

on Silk Road. But when a

Florida man, who went by the

screen name BTC King,

approached Charlie about

privately exchanging large

amounts of money for Silk

Road

customers,

Charlie

devised a way to do it without

attracting

notice.

When

Charlie’s

programming

partner in Wales questioned

Charlie about the deals with

the man, Charlie argued that

they wouldn’t be a problem.

“He has not broken any

rules and silk road itself is not

illegal,” Charlie wrote to

Gareth. Besides, he said: “We

make good profit from him.”

WHEN ROGER VER invested in

BitInstant, he could tell that

Charlie was a raw talent and

offered

himself

as

the

company’s marketing director

to help steer Charlie’s idea.

He then connected Charlie

with Erik Voorhees. Erik,

who was still living in New

Hampshire,

was

more

ideological than Charlie, but

he was also more careful and

grounded, and Roger thought

they would complement each

other. The month Erik joined

BitInstant,

the

company

processed

$530,000

in

transactions,

up

from

$250,000 just two months

earlier.

As they began working

together, Roger and Erik

jokingly gave Charlie the

nickname “Statist” for his

more traditional politics and

respect for government. But

that didn’t stop BitInstant

from becoming a popular

service

among

all

the

ideologically

motivated

people whom Roger and Erik

were winning over, who were

looking for the easiest way to

get their hands on Bitcoin.

In February Erik appeared

at Liberty Forum—one of the

Free State Project’s two

major

annual

events—to

speak about Bitcoin’s appeal

to anyone opposed to the

American government. The

room was packed and Erik

was mobbed afterward by

interested people wanting to

get

involved.

The

price

reflected that interest. After

bottoming

out

in

late

November at around $2, by

February the price of a single

Bitcoin

was

stabilizing

around $5. It didn’t hurt that

Bitcoin made its first serious

foray into popular culture in

January 2012 when an entire

episode of The Good Wife

was based on a plot about

Bitcoin.

In April Erik traveled

from New Hampshire down

to New York to meet Charlie

in person for the first time

and to make a presentation at

the first-ever New York Tech

Day, an event designed to

connect

startups

and

investors. Charlie and Erik

spent the morning setting up

their booth at the storied Park

Avenue Armory with slick

BitInstant

banners

and

branded key chains.

Soon after the doors

opened, two older gentlemen

with the casual whiff of

money approached Charlie.

He launched into his elevator

pitch for Bitcoin, leaving out

anything about central banks,

and focusing on the ability to

transfer money around the

world free. The two men had

never heard of Bitcoin, but

one had worked in the

import-export business and

knew how expensive it could

be to move money across

international borders. What’s

more, they liked Charlie’s

irrepressible energy, which

was immediately evident, and

recognized from his last

name, Shrem, that he was a

member of the tight-knit

Syrian Jewish community

that they belonged to.

On the spot, the two men

offered Charlie a free space to

work at The Yard, an office

for startups they had recently

opened in Brooklyn. They

also suggested they would be

interested in making an

investment in BitInstant. That

same

afternoon,

Charlie

visited The Yard, built out of

an old industrial building in

the hip neighborhood of

Williamsburg. Bitcoin was

quite literally moving out of

the basement and into the real

world.

WHEN CHARLIE HAD begun

BitInstant less than a year

earlier, it was a response to a

very specific and narrow

problem—the difficulty of

getting money into Mt. Gox’s

bank

accounts

to

buy

Bitcoins.

But

Charlie’s

conversation with the two

potential investors at New

York Tech Day illustrated his

growing awareness that his

company could also help

ordinary

people

take

advantage of a much more

practical service than Bitcoin

could offer the world. Thanks

to his upbringing in a

community of entrepreneurs,

Charlie knew that in 2012

businesses still had few good

ways of instantly transferring

money to pay for goods and

services. A normal bank

payment took several days,

and a wire transfer moved

faster but cost $30 to $50

each time.

Charlie’s practical bent

had led him, unwittingly, to

an issue that had rarely been a

part

of

the

Cypherpunk

discussions but that was

perhaps the most widely

acknowledged problem with

the existing financial system:

the creakiness of the old

payments system.

In March 2012, a month

before Charlie found his

investors, the Federal Reserve

had

held

a

daylong

conference about consumer-

payment systems at which

there was a lot of grousing

about the fact that despite all

the technological innovation

going on in the world, the

infrastructure

for

moving

money around the country

was still based on technology

from the 1960s and 1970s.

The

Automated

Clearing

House,

or

ACH,

which

facilitated payments between

bank accounts, was created in

the 1970s and had not

changed much since; this

helped explain why bank

transfers took at least a day to

go

through.

For

most

Americans, the easiest and

fastest way to send money to

a friend or family member

was still the old-fashioned

paper check. This problem

was not just in the United

States. A week before New

York Tech Day, the Canadian

government announced the

launch of a new digital

currency effort, called Mint

Chip, that it hoped would

spur innovation in payments.

The weakness of the

existing system had been

evident during the financial

crisis when the Wall Street

bank Morgan Stanley needed

a $9 billion infusion from a

Japanese firm. The agreement

was reached on a Sunday, but

the money could not be sent

because the wire network was

down for the weekend and the

next day was Columbus Day.

It turned out that even banks

couldn’t send each other

money on holidays. In order

to get around this, the

Japanese bank cut an absurd

$9 billion paper check.

With Bitcoin, transfers

did not happen instantly, as

was sometimes claimed. A

Bitcoin

transaction

was

official only after it had been

confirmed by a miner and

included on the blockchain,

which

generally

took

a

minimum of ten minutes. But

it took around ten minutes at

any hour on any day of the

week and could be done from

a smartphone, which was a

lot better than waiting until

Tuesday.

The potential of the

Bitcoin network as a new,

cheaper, and faster payment

system

represented

an

opportunity for the network

that

went

beyond

the

controversial anonymity it

appeared to offer, and the

ideological attraction of its

decentralization.

Charlie

wasn’t the only person who

had spotted this opportunity.

Two

former

fraternity

brothers at Georgia Tech had

founded a company called

BitPay, which looked to

harness the network as a

cheaper way for merchants to

accept

online

payments,

while also giving Bitcoiners a

place to actually spend their

virtual currency. With BitPay,

merchants

could

accept

Bitcoin, and BitPay would

immediately

convert

the

virtual currency into dollars

and deliver those dollars into

the merchant’s bank account.

This

was

attractive

to

merchants because BitPay

charged around 1 percent for

its service while credit card

networks generally charged

between 2 and 3 percent per

transaction. What’s more,

whereas

credit

card

companies

could

recall

money from a merchant in the

case of a customer dispute,

Bitcoin

transactions

were

irreversible.

The opportunity here was

also

evident

to

another

businessman from Charlie’s

Syrian Jewish community, a

man named David Azar, who

was the son of Charlie’s

childhood

dentist.

When

David heard about Charlie’s

business from a friend, he

was intrigued. David ran a

chain of check-cashing shops

and

he

had

intimate

experience

with

all

the

drawbacks of the existing

payment networks.

David,

an

energetic

entrepreneur

who

came

across to others as something

of a street fighter, invited

Charlie to his office, which

was just a few blocks from

the BitInstant offices. In their

first meeting, David boldly

told Charlie that he wanted to

invest money in Charlie’s

company and had the money

to do it. Charlie was thrilled,

but explained that he was

already working with two

other investors from the

Syrian Jewish community

who were planning to put

money into BitInstant. David

made it clear to Charlie that

he wanted to make the

investment on his own and

that he was not one to easily

take no for an answer.

CHAPTER 13

May 2012

Less than a year earlier,

when Charlie Shrem had

stopped by the first Bitcoin

conference in New York, he

had been too timid to

introduce himself to anyone.

Now, in the early summer of

2012, he was the toast of the

Bitcoin world and was getting

invitations

from

all

directions. In late April he

flew to San Francisco to

appear on a panel about the

future of money. In the crowd

afterward, a small, svelte

Russian

man

introduced

himself and asked if Charlie

would

be

interested

in

traveling to Vienna to join a

small group advising the man

on his own Bitcoin startup, a

credit-card-thin device that

could serve as a Bitcoin

wallet. Once Charlie was

back in New York, he

discovered that the man,

Alexander Kuzmin, was a

minor Russian tycoon who

was directing a fortune he’d

made from Siberian oil to

anarchist causes. Kuzmin also

invited Erik Voorhees, Roger

Ver, and Gavin Andresen to

come to Vienna and sent

along Bitcoins to pay for their

travel expenses.

While Charlie and Erik

prepared for the trip, they

were also being pursued by

the two investors who wanted

to

give

$1

million

to

BitInstant.

This

was

surprisingly hard for Charlie

because of his instinctual

aversion to telling people

things they didn’t want to

hear. Instead, he strung them

both along. When the first

investors had to cancel their

plans to join Charlie in

Vienna, the second, David

Azar, quickly booked a ticket.

In Vienna, when the Russian

mogul wasn’t pampering the

Bitcoiners at his airy two-

story

penthouse,

David

treated the BitInstant team to

a good time. The men visited

a sex club that had a hefty

entry

charge

and

an

additional

fee

for

each

intimate act with the women.

After paying the admission

fee for the others, David

turned around and went back

to his room. David also

quietly

offered

Charlie

several thousand dollars on

the side if Charlie chose

David’s investment.

When Charlie and Erik

returned to New York they

decided to go with David.

This required a surreptitious

exit from the working space

that had been given to them

by

the

first

potential

investors.

While

Charlie

broke the bad news, Erik

hurriedly moved all their

computers

into

Charlie’s

BMW so they would be ready

to leave in a hurry when

Charlie left his meeting with

the disappointed men who

had put their hopes in him.

Charlie got yelled at but, as

he and Erik sped away

laughing, it felt like just

another exhilarating incident

in their intoxicating ascent.

Eric was becoming a

figure in the Bitcoin world in

his own right, thanks in no

small part to a gambling site,

SatoshiDice, which he had

started up in late April. The

game of odds was based on

the same hash functions and

math underlying Bitcoin, and

the outcome of each bet was

visible on the blockchain.

Players gambled by sending

small payments to specific

Bitcoin

addresses,

and

winning bets immediately

paid out. If this had been

done

using

traditional

payment

networks,

the

transaction fees would have

made

it

prohibitively

expensive, but with Bitcoin

the payments could go in and

out free. The game itself had

been invented by someone

else, but Erik bought the

concept for 45 Bitcoins, gave

it a user-friendly website, and

got it up and running. By July

it had already become wildly

popular and he began making

plans to sell stock in the

company on a Bitcoin stock

exchange set up by a man in

Romania.

Erik

made

his

commitment to Charlie and

BitInstant more firm when he

moved to New York full-time

in July and convinced a friend

from Colorado, Ira Miller,

who had been working with

him on Bitcoin projects, to

move

with

him.

The

BitInstant

crew

worked

briefly out of Erik and Ira’s

new apartment in Brooklyn,

but they soon rented their

own office in Manhattan just

feet from the storied Flatiron

Building. Charlie had his own

office with windows looking

onto the street. In the main

room, he installed a big

screen that displayed the live

price of Bitcoin.

To Erik’s delight, Charlie

was beginning to be won over

by the more ideological

arguments

for

Bitcoin.

During the summer, they met

Roger in New Hampshire for

PorcFest, a festival in the

woods held by the Free State

Project. They were amazed to

find that many of the vendors

already

accepted

Bitcoin,

allowing them to make it

through the weekend using

almost no dollars. They had

made the theme song for

BitInstant—“It’s Yo’ Money

Why

Wait?”—and

Erik

would occasionally blast it

from the back of his Subaru

Impreza.

IT WAS, THOUGH, becoming

increasingly clear that Bitcoin

was on a trajectory that was

going to be hard to sustain as

the authorities became more

aware of it.

Silk

Road

was

still

driving a significant portion

of the real transactions on the

Bitcoin network, including

many of the people buying

coins from BitInstant and Mt.

Gox. When a friend asked

Charlie about Silk Road,

Charlie explained that “it

funds a decent percentage of

the overall Bitcoin economy.”

The consequences of this

had become hard to avoid

when a remarkably well-

informed

report

entitled

“Bitcoin Virtual Currency,”

prepared by the FBI, had

leaked in May. From the first

line, it was evident that the

FBI did not generally view

Bitcoin in a positive light; the

report described the network

as a “venue for individuals to

generate, transfer, launder,

and steal illicit funds with

some anonymity.” The report

also said that the agency

“assesses

with

medium

confidence

that

law

enforcement can identify, or

discover more information

about malicious actors.”

Charlie kept working with

the BTC King, who helped

Silk Road customers acquire

coins.

But

Charlie

was

increasingly trying to follow

the relevant rules when it

came

to

gathering

information about customers

who made transfers above

prescribed

minimum

amounts. He also registered

with the Treasury Department

agency

responsible

for

regulating

money

transmitters, the Financial

Crimes

Enforcement

Network, or FinCen.

The issue of Bitcoin’s

reputation had been a steady

topic of conversation when

Charlie, Gavin, and the others

had been in Vienna. At a café

Charlie had chatted with

Gavin about some sort of

foundation that could serve as

a neutral voice to bring the

technology

into

the

mainstream and create some

distance from Silk Road.

When

Gavin

returned

from

Vienna

he

had

connected Charlie with Peter

Vessenes,

a

Seattle

entrepreneur who was trying

to break into the Bitcoin

space. Peter did not have

much of a business plan, but

he

had

some

practical

business experience and had

already managed to land

some funding for his startup,

CoinLab. He was also very

eager to help Bitcoin break

into the mainstream.

In a series of increasingly

excited e-mails, Charlie and

Peter both emphasized the

need for a foundation that

could separate itself from the

virtual

currency’s

controversial past. Charlie

told Peter that those involved

had to be people “without

tarnishes and have spotless

reputations within Bitcoin.

Anyone involved with even

an inkling of mistrust ruins

our whole legitimacy.”

Roger was included in the

planning of the foundation,

and promised to donate 5,000

Bitcoins to support it. But it

was decided early on that

Roger would not take a seat

on the board because of the

prison term he had served.

Peter pushed to be given a

leadership role because of his

past

entrepreneurial

experience. When Charlie

and Roger suggested that

others—such as Jed McCaleb

and

Jesse

Powell—be

included, Peter quickly shut

down the idea, saying it

would be better to restrict the

planning to a small circle of

people.

The man who would

serve as the glue in bringing

this all together was Patrick

Murck,

an

unassuming

Seattle lawyer whom both

Charlie

and

Peter

had

independently found. Patrick

had not come to Bitcoin with

the same intentionality as so

many members of the early

community. He had spent his

first years out of law school

working

at

a

firm

in

Washington, DC, where he

had grown up as the child of a

federal employee.

Recently,

though,

not

long after his son was born,

Patrick’s mother-in-law was

diagnosed with cancer, and he

and his wife had sold

everything and moved to

Seattle to help care for her.

His wife had given up her

own job at the National

Wildlife Federation. Patrick

had

begun

to

get

his

professional life back on

track in Seattle by getting a

job at an advertising startup

that focused on digital games

and tokens; there he began to

learn

about

the

law

surrounding digital money.

When that job didn’t work

out, Patrick found that he was

one of the only people with

any

legal

expertise

in

anything close to virtual

currencies and he started

consulting

for

Bitcoin

startups like BitInstant.

Patrick was indicative of

the increasingly practical turn

that Bitcoin was taking. He

was not a libertarian—he had,

in fact, volunteered for the

Obama campaign in 2008.

His work with Bitcoin had

started as a job and evolved

into a passion, rather than the

other way around.

In a first group meeting,

by phone, the men all agreed

that the foundation would

steer clear of the politics that

had been associated with the

technology

and

would,

instead,

focus

on

standardizing the technology

and

providing

a

neutral

meeting

ground

for

the

community. They held out, as

their model, the foundation

connected to the open source

Linux

operating

system.

Occupy Wall Street this was

not.

All the men on the call

were aware that one of the

biggest complications that

faced them was Mt. Gox. The

exchange had continued to be

the largest venue for buying

and selling Bitcoins. Mark

Karpeles had brought on new

staff, many of them fellow

French expatriates, and found

the company larger offices

just a few blocks from Roger

Ver’s apartment (so close, in

fact, that Mark’s staff initially

used Roger’s wifi network).

But Mark’s social skills had

not grown with his company.

Despite having a Japanese

wife and now a young son, he

rarely talked about them with

others and seemed much

more interested in his cat

Tibanne, about whom he

posted

loving

items

on

Twitter and YouTube. At

work, Mark kept all the

important responsibilities in

his own hands and as a result

the business moved only as

quickly as Mark did. The

exchange

was

constantly

facing complaints about long

wait

times

and

poor

management. When Roger

lent Mark money, he had

trouble getting paid back, and

when he needed a transaction

to go through, he would

sometimes have to visit the

Mt. Gox offices.

Peter Vessenes, in Seattle,

was hoping to raise money

from investors to either

purchase Mt. Gox or take

over some of its management.

Peter had written to Mark and

told him: “My gut, and it’s

just a gut feeling, is that Gox

could use more finance and

global business experience to

grow in the way you guys

want it to.”

At the same time Peter

was planning a first in-person

meeting for the group behind

the Bitcoin Foundation, he

also made a trip to Tokyo to

sell Mark on the idea of

teaming up. Personally, the

men were like oil and water.

Peter

was

the

genial

American businessman who

liked to ease into business

conversations

by

talking

about family and personal

life,

while

Mark

rarely

discussed anything beyond

work, and hardly even that.

By the end of the visit,

though, the men had begun

planning for Peter’s company

to take over Mt. Gox’s

American customers. Peter

did not invite Mark to a first

meeting of the group behind

the foundation, but he did

secure a promise from Mark

to donate 5,000 Bitcoins to

the organization. He also got

Mark to hand over the

domain

name

BitcoinFoundation.org, which

Mark had acquired a year

earlier.

Almost as soon as Peter

was back from Tokyo, Roger,

Gavin, and Charlie flew to

Seattle for a meeting to

formalize

the

Bitcoin

Foundation. During the two

days of meetings, Gavin

made it clear that he had no

interest in doing anything

other than working on the

Bitcoin

code.

Charlie,

meanwhile, was eager to take

charge of the foundation’s

annual conference, which he

said could raise $200,000 or

more. Patrick Murck, the

lawyer, took on much of the

hard work of bringing the

foundation into existence.

To

underscore

the

decentralized

principle

of

Bitcoin, the group agreed that

the bylaws for the foundation

would be posted on GitHub,

the open source software site,

where people could comment

and suggest additions or

changes. But in a rather

undemocratic step, the men in

Seattle decided to anoint

themselves,

and

Mark

Karpeles, the initial members

of the Bitcoin Foundation

board. Peter had the clever

idea of including, as a

founding member, Satoshi

Nakamoto, or whoever could

prove ownership of Satoshi’s

public key: DE4E FCA3

E1AB 9E41 CE96 CECB

18C0 9E86 5EC9 48A1.

A rare tense moment

during the gathering came

when Roger dressed Charlie

down for constantly opening

up his laptop to deal with

small tasks at BitInstant—

transferring money or dealing

with customer e-mails. For

Roger, this brought back bad

memories of Mark’s inability

to delegate responsibility to

others. Roger, with evident

frustration, told Charlie to

hire more people to take care

of things for him.

“You are the CEO,”

Roger said. “You shouldn’t

be responding to customer

service requests.”

The

eager-to-please

Charlie put his laptop away,

but he had trouble keeping it

closed.

At the end of the day, the

group retreated to the palatial

waterfront home of another

cofounder of Peter’s new

virtual currency company—a

former Microsoft executive—

who lived on a beautiful,

exclusive

peninsula

near

Seattle. When the wealthy

neighbors wandered over,

Roger immediately got them

all set up with Bitcoin wallets

on their phones. Watching

Roger evangelize with his

usual gusto about “the most

important invention in history

since the Internet,” Charlie

said to the others, with a

laugh: “Look at Bitcoin

Jesus.” It was a nickname that

would stick.

The luxurious evening on

the water made it clear that

Bitcoin was losing some of its

fringe appeal but winning

some useful friends.

CHAPTER 14

August 2012

Charlie Shrem and Erik

Voorhees walked along the

southern edge of Madison

Square Park to Benvenuto

Café. They were there to meet

Barry Silbert, one of the big

names in the New York tech

scene. As Charlie walked into

the café, he expected to see

the sort of brash icon of new

money caricatured in movies

like The Social Network.

What he found instead was

someone with a boyish face

and straight bangs that made

him look almost as young as

Charlie.

Only thirty-three, Barry

Silbert was viewed as a

prodigy in the financial

industry, having worked at a

Wall Street firm, managing

bankrupt companies, before

leaving to create a financial

startup that had made it easier

to buy and sell the stock of

companies that didn’t trade

on stock exchanges. The

company,

SecondMarket,

landed Barry on every list of

forty under the age of forty.

Barry had already been

quietly exploring Bitcoin for

months. His interest was not

political. He saw Bitcoin’s

potential

to

address

inefficiencies in the existing

ways of moving payments

and other elements of the

existing

banking

system.

Given the fringe status of

Bitcoin, Barry feared that

going public with his interest

in the technology could

damage the reputation of his

company, which was funded

by several leading venture

capitalists. But behind the

scenes, Barry was seeking out

anyone who could connect

him with interesting virtual-

currency investments. He had

also spent around $150,000

buying up Bitcoins over the

course of 2012.

Charlie and Erik were

eager for the meeting because

David Azar had proved

difficult to pin down since the

BitInstant guys agreed to

accept his investment after

the trip to Vienna earlier in

the summer. If nothing else,

Barry could advise them on

how to handle the situation.

Barry obliged, but he also

saw

an

opportunity

for

himself. He had already made

a few angel investments in

Bitcoin companies with his

own money—including one

in

CoinLab,

the

Seattle

company founded by Peter

Vessenes—and was eager to

expand his portfolio. What’s

more, he had recently gotten

one of the biggest venture

capital firms in New York—

one of his early investors—

excited about Bitcoin.

Within days, Charlie had

scheduled a coffee with

Barry’s big investor, Larry

Lenihan, a partner at the

billion-dollar firm FirstMark

Capital, which had bet on

startup stars like Pinterest and

Aereo. When they met, Larry

was slightly put off by

Charlie’s untamed energy and

hubris, but he liked the idea

behind BitInstant enough that

he immediately contacted

Barry and said he wanted to

explore

making

an

investment. In an e-mail to

Charlie,

he

asked

when

Charlie and Erik could come

in to meet his partners: “I’d

also like to bounce an idea off

you guys about having NYC

invest—this

could

be

important. It would be out of

Mayor Bloomberg’s office

and

it

would

provide

enormous

amounts

of

credibility for the effort.”

DAVID AZAR’S OPPORTUNITY

to invest in BitInstant was

about to disappear when he

went with some friends to the

Spanish island of Ibiza. While

lounging at Blue Marlin, one

of the trendy island’s most

famous beach clubs, David

noticed two tall men with

waves of glossy brown hair,

who would have drawn his

attention even if they weren’t

Tyler

and

Cameron

Winklevoss.

The Winklevoss twins

had

become

a

cultural

phenomenon owing to their

involvement

with

Mark

Zuckerberg when they were

all

undergraduates

at

Harvard.

Zuckerberg

had

initially teamed up with the

brothers to build a social

networking site, but when

Zuckerberg went off on his

own and created Facebook,

the twins sued him, claiming

he stole their idea. They

eventually won a $65 million

settlement and the story

inspired the Oscar-winning

film The Social Network.

Aware that the brothers

were tech savvy and wealthy,

David seized the opportunity.

He sidled up to Cameron and

dropped the name of a friend

of theirs in New York. David

then asked Cameron if he

knew anything about virtual

currencies. Cameron did not

and David’s brief description

elicited an interested nod. The

encounter ended with David

promising to follow up.

David caught the brothers

at an opportune moment.

Recently retired from their

rowing careers, which had

taken them to the 2008

Beijing summer Olympics,

they were using their money

from the Facebook settlement

to

set

up

their

own

technology investing firm.

Just before they had left for

Ibiza, Winklevoss Capital had

leased an office a few blocks

from the BitInstant offices in

Manhattan.

At their family beach

house on Long Island the next

weekend, Cameron read over

the articles David sent along.

Both brothers had majored in

economics at Harvard and,

after just a bit of reading on

his laptop, Cameron called

his brother over.

“You’ve got to come over

here and check this out,”

Cameron said to Tyler.

Tyler always played the

right-handed, rational check

to his more dreamy, left-

handed brother. But as Tyler

began reading, he saw what

his brother was talking about.

Both realized this was either a

scam or a big deal—but

worth exploring. When they

got David on the phone, he

told the twins about the

company he was preparing to

invest in and offered to

connect them with the guys at

BitInstant, with the clear

implication that the brothers

might want to invest in it as

well.

Two days later, Cameron

arrived

at

BitInstant’s

headquarters on Twenty-third

Street and folded his big

frame into Charlie’s office.

The

conversation

with

Charlie and Erik about how

the blockchain worked and

how Bitcoin was different

from

previous

digital

currencies that had not taken

off—like Facebook credits—

lasted for almost two hours.

Charlie

came

across

as

something of a Tasmanian

devil, with energy shooting in

all directions, not always in

an ordered fashion. But for

every skeptical question the

twins asked, Erik had a well-

thought-out answer. Cameron

was particularly impressed by

Erik’s decision to take his

entire salary from BitInstant

in Bitcoin and to keep his

savings

in

the

virtual

currency. Within a few days,

the twins let David know that

they were prepared to invest

alongside him and set up a

dinner to work out the terms.

With Charlie and Erik, they

opened up a jokey banter by

e-mail as the twins went back

and forth about the basics of

Bitcoin and the nature of

money.

Cameron: “Money does

have some intrinsic value, for

example if you were freezing

on top of a mountain and all

you had was cash you could

burn it to keep warm a la

Cliffhanger.”

Charlie:

“Anything

is

valued differently in different

circumstance. . . . A dollar

bill to a coke head is worth

more than a dollar bill to you

and I.”

Cameron: “What about a

dollar bill to a stripper?”

Charlie and Erik were

now back in the enviable but

awkward position of being

courted by two different

investing groups.

Each member of the

BitInstant team weighed in.

Roger was not excited about

the Winklevoss twins. He

thought that they were free

riders, who had gotten rich

thanks to the legal system,

rather than by inventing

something real. He also

worried about the terms of the

deal that David and the twins

were

offering,

which

provided much less flexibility

and gave David more control

than most startup investors

have.

Roger

was

still

a

libertarian, but he was a

practical

one,

and

he

understood the value of

money

from

established

venture capitalists like Barry

Silbert and FirstMark Capital

and especially the value of

getting some buy-in from the

City of New York.

“This is one of the most

interesting investors possible

because I suspect it would

give us a great deal of added

protection

against

future

trouble with regulators /

financial

police,”

Roger

wrote

from

Tokyo,

advocating for Barry and

FirstMark over David Azar

and the twins.

Barry was already taking

Charlie and Erik under his

wing and trying to soften

some of their rough edges. He

cautioned Charlie to stop

making comments in his e-

mails about his drinking and

carousing. After taking the

BitInstant guys to an industry

party he wrote a laundry list

of their social faux pas that

they needed to work on:

Take it easy with

name dropping . . .

Larry would not

appreciate it if he

knew you were telling

people he was buying

Bitcoins.

Charlie—your

defense of Bitcoin to

Brian at Tribeca came

across as very

aggressive. Be patient,

LISTEN and try to

disarm each one of

their arguments.

Do your best to

keep your phones in

your pocket. It is anti-

social—borderline

rude—to be doing

emails, twitter, etc.

during dinner.

Charlie didn’t love the

paternalistic guidance. But

more important, when Charlie

considered which investment

to take, David had something

that Barry could never match:

he was part of Charlie’s tight-

knit

Syrian

Jewish

community. On hearing that

BitInstant was thinking about

taking an investment from

Barry

Silbert,

David

exploded, accusing Charlie of

disloyalty. Members of the

Syrian Jewish community

generally viewed themselves

as having more responsibility

to each other than to the

outside world. This was an

insular community in which

even marrying a Jew from

Europe

or

Turkey

was

considered

intermarriage.

Charlie was terrified that he

would become a persona non

grata in his neighborhood if

he backed out of his deal.

In

addition,

David’s

partners,

the

Winklevoss

twins, had a glamour that was

hard for him to resist. To

someone who had always

been the last one picked for

dodgeball, the tall blond

Olympians promised not just

money, but a life in which he

could no longer be ignored.

Then there was the danger

of turning down David’s

money for a deal with

FirstMark that was only in the

initial stages. Charlie wrote to

Barry:

Is it worth risking a

good deal I have now

to see if a deal may or

may not happen? I

mean, everything up

until now with Larry

has just been talk. I’ve

been farther with

other VC’s who

flaked on me last

minute. This deal I

have now has been in

the works since June,

4 months and Im

tired!!

Barry pushed back hard:

This is your company

and you gotta do what

you gotta do, but just

want to throw in my

two cents. It would be

game changing for

your business and the

Bitcoin industry for

FirstMark capital to

make an investment in

BitInstant.

From

Tokyo,

Roger

struck up a back-channel

conversation with Barry, both

to explain what was holding

Charlie back, and to see if

Barry could make an offer

that would put some of

Charlie’s concerns to rest:

Charlie currently feels

some cultural pressure

to close the other deal,

but if your offer is

better, he will have

every reason to not

accept it and won’t

have any

ramifications from his

social circle.

Barry agreed to put up a

$75,000 convertible note in

order to create a bit of

breathing room while he and

FirstMark worked on a more

formal offer. Roger quickly

wrote to Charlie: “I don’t

want to burn any bridges, but

I don’t think we should feel

bad asking David to wait an

extra two weeks. He has

already demonstrated that he

is not in a hurry by taking

months and months to put

together a deal.”

Charlie did hold off, but

he eventually resolved the

issue between David and the

twins on one side and Barry

and FirstMark on the other by

getting David to soften up

some investment terms that

had turned Roger off. Charlie

also convinced Erik that

David’s experience in the

check-cashing

business

would

immediately

help

BitInstant

deal

with

regulatory issues it could face

as lawmakers looked to rein

in virtual currencies. To close

the deal with David, Charlie

offered Erik a 2 percent stake

in BitInstant. They finalized

everything sitting on the

porch of David’s lawyer in

the Syrian Jewish section of

Brooklyn.

The

agreement

gave Maguire Ventures, the

investment entity created by

David and the Winklevoss

twins,

22

percent

of

BitInstant

for

$880,000.

Charlie kept 29 percent of the

company and Roger kept 15

percent, with the rest being

split

among

the

other

employees.

By the time the final

contract was signed, Charlie

was already reaping the most

immediate benefit of the deal:

he was serving as a personal

Bitcoin

guide

for

the

Winklevoss twins. He began

buying them coins and helped

them use Bitcoin to pay a

Ukrainian programmer for

work on the Winklevoss

Capital website. Charlie and

Erik also set up a time to sit

down with the twins and give

them a more in-depth Bitcoin

tutorial at their offices.

Charlie

and

Erik

deliberately scheduled the

meeting

on

a

Saturday

evening,

when

the

conversation might bleed into

a night of partying with the

brothers, and the twins didn’t

disappoint them. After a

session on Bitcoin, leavened

with

alcohol,

Cameron

invited Charlie and Erik to

join him for a night out. Girls

the twins knew showed up

and the crew headed to a

party in a loft downtown,

followed by a visit to a

speakeasy. Charlie got so

drunk on shots of rum that he

threw up on his shoes in the

middle of the bar. He still

managed to end up back at

Cameron’s apartment with a

girl—though Charlie ruefully

reported that it didn’t go

anywhere.

“What a night,” Cameron

wrote to Charlie and Erik the

next morning. “I trust u guys

made it home in one piece.”

“That was a blast,” Erik

wrote back. “I had to peace

out before I drowned in

liquor.”

It wasn’t just Charlie and

Erik who found all of this

thrilling.

For

the

twins,

despite their past successes,

investing in Bitcoin at this

point still felt like getting in

on the ground floor of

something

huge,

before

anybody else had even heard

about it.

But before they had a

chance to savor it, the first

signs of trouble appeared. In

early November, a hacker

attacked the BitInstant site,

forcing it down several times.

The hacker demanded a

10,000

Bitcoin

ransom,

keeping Charlie’s small team

of

programmers

working

around the clock. At about

the same time, BitInstant’s

longtime bank, Citi, began

asking hard questions after

months of not paying much

attention to the account. This

forced

BitInstant

to

temporarily stop taking in

new money through its bank

account. A little more than a

week after the investment

was made official, David

Azar snapped at Charlie: “I

didn’t sign up for this.”

As David took ownership

of

the

company,

he

questioned why the business

wasn’t growing faster. At the

same time, he declined to

hand over the first tranche of

money. He demanded a full

audit of BitInstant that was

taking much longer than

expected. He would shoot off

brief e-mails like machine-

gun

fire,

asking

new

questions

before

he

got

answers to the previous ones.

Erik watched, with a

mixture of fascination and

fear,

as

the

arguments

between Charlie and David

quickly took on the form of a

feud between angry siblings.

“David, I don’t appreciate

you calling me a child and

speak

to

me

in

a

condescending manner. I’ve

always treated you with the

utmost respect and I would

think I deserve the same from

you,” Charlie wrote in an e-

mail to David in early

November after one fight. He

went on:

To this date, you still

have an elementary

level of Bitcoin and

BitInstant. I need you

to understand why we

are in business, and

what we are trying to

accomplish in this

world. You tell me

that I need to learn

everything from you,

well you still have not

learned anything from

us.

You need to make

a decision on how you

want to act going

forward, with your

attitude and position

towards us.

CHAPTER 15

October 2012

In mid-October Charlie

Shrem and Erik Voorhees

played

host

to

Wences

Casares, a slender man with

dark movie star looks, a

sophisticated

accent,

and

clothes that signaled elegance

and

ease.

Wences

had

reached out to the BitInstant

team out of the blue, giving

little indication of his specific

intentions regarding Bitcoin.

As he began talking with

Charlie and Erik, though, he

quickly came across as very

different from the previous

curious

programmers

and

entrepreneurs

who

had

stopped by the New York

offices. Wences seemed to

already have a full grasp of

the mechanics of Bitcoin. He

talked about potential risks

that only the best-informed

Bitcoiners knew about and

conversed

knowledgeably

about monetary policy in the

United States and the country

where he had grown up:

Argentina. When he spoke, it

was in a gentle but candid

way, giving the impression

that much of what he said

was a kind of personal

confession.

“Bitcoin forced me to

realize I didn’t understand

money,” Wences liked to say.

Charlie and Erik couldn’t

immediately

place

him

among the familiar Bitcoin

types. He wasn’t a libertarian,

raving

about

the

transgressions

of

the

government, and he wasn’t a

tech nerd, fascinated by the

cryptography. When he left,

after a polite conversation,

Erik and Charlie still weren’t

sure why Wences had come.

At the time of his visit to

New York, Wences was in

the first year of running a

startup,

Lemon

Digital

Wallet, which provided a way

for customers to keep all their

credit cards and coupons in

digital form on a smartphone.

But this startup was only the

latest in a career that had

already turned him, at age

forty, into one of the most

successful

technology

entrepreneurs to ever come

out of South America. In his

teens, he had established

Argentina’s

first

Internet

provider, and in his twenties

he founded a company that

became a sort of Latin

American E*Trade. Backed

by the storied New York

investor Fred Wilson, the

company made $750 million

for its investors when it was

sold to Banco Santander.

Wences and his wife Belle

used some of his new fortune

to buy a catamaran and sail

around the world with their

young children. When they

returned, the family moved to

Silicon Valley.

Wences had first learned

about Bitcoin in late 2011

from

a

friend

back

in

Argentina who thought it

might give Wences a quicker

and cheaper way to send

money back home. Wences’s

background

in

financial

technology

gave

him

a

natural appreciation for the

concept.

After

quietly

watching and playing with it

for some time, Wences gave

$100,000 of his own money

to two high-level hackers he

knew in eastern Europe and

asked them to do their best to

hack the Bitcoin protocol. He

was especially curious about

whether

they

could

counterfeit Bitcoins or spend

the coins held in other

people’s wallets—the most

damaging possible flaw. At

the end of the summer, the

hackers asked Wences for

more

time

and

money.

Wences ended up giving

them $150,000 more, sent in

Bitcoins. In October they

concluded that the basic

Bitcoin

protocol

was

unbreakable, even if some of

the big companies holding

Bitcoins were not.

By the time he visited the

BitInstant offices, Wences

had

become

a

Bitcoin

believer, and he was intent on

spreading the idea among his

powerful friends in Silicon

Valley, a place that had so far

largely ignored Bitcoin, but

that would be vital if the

technology was going to

move into the mainstream.

FOR WENCES, THE allure of

Bitcoin went deeper than just

professional interest, to a time

before he was wealthy and

successful,

during

his

childhood in a country that

had been—and remained—

locked

in

a

seemingly

intractable battle with its own

currency.

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 and so in 1985

the new peso was replaced by

the austral, which was worth

1,000 new pesos. Seven years

later, continuing inflation led

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.

Wences was descended

from one of Argentina’s

aristocratic families, but his

particular branch had lost

everything and ended up on a

rustic sheep ranch out in the

emptiness

of

Patagonia.

When his father delivered

wool and the check didn’t

come through for a month,

the value of the family

income could fall sharply

because of inflation, setting

off yet another round of

household cutbacks.

“I think I understand

economics better than most

people because I grew up in

Argentina,” he would say.

“I’ve

seen

every

single

monetary experiment you can

imagine. This is the street

smart economics. Not the

complex PhD economics.”

One particular incident

had

seared

itself

into

Wences’s memory. In 1984,

during the first major episode

of hyperinflation after the

Argentinian military junta

lost power, Wences’s mother

came to get him and his two

sisters from school. His mom

was carrying two grocery

bags filled with money—the