Bitcoin Billionaires

by Ben Mezrich

  Voorhees smiled. “The same properties that make gold valuable, make bitcoin valuable.”

  Cameron and his brother may have just started climbing the learning curve of this new digital currency, but as economics majors at Harvard, they were well versed in the world of old-fashioned money. At Harvard, they’d studied under Martin Feldstein, former chief economic adviser to President Ronald Reagan and the real-life inspiration for the character of Mr. Burns on The Simpsons. The brothers were steeped in the works of Adam Smith, Milton Friedman, and John Maynard Keynes. They understood that gold was worth what people were willing to pay for it—a case of classic supply and demand. They also understood what drove that demand—what made gold “good” money. They’d even once presented on the topic with a PowerPoint slide show.

  Initially, gold’s chemical properties made it the natural choice; going down the elements on the periodic table and analyzing their properties, you could first cross off the gases—right from the get-go. Since whatever substance was going to be used as money couldn’t be highly reactive—otherwise it might explode in your hands—and it couldn’t be corrosive—otherwise it would rust—that disqualified another thirty-eight elements. And since money had to be rare, but not too rare—a metal like copper was too abundant, while a metal like osmium was too rare, being found only in meteorites—that ruled out another twenty-six elements.

  Which left only rhodium, palladium, platinum, silver, and gold—five of the eight noble metals. Rhodium and palladium wouldn’t be discovered until the 1880s, well after money had been in use for thousands of years; and platinum’s melting point would have been too high for preindustrial furnaces. By process of elimination you were left with silver and gold. Silver tarnished easily and had a much greater industrial application—too useful to make good money—leaving gold just useful enough.

  “Gold is valuable because of its naturally occurring properties: it’s scarce, durable, portable, divisible, fungible, hard to counterfeit, and easy to authenticate,” Tyler said.

  “Exactly,” Voorhees responded, “and bitcoin has all of those properties too—”

  “But Bitcoin is better at being gold than gold,” Charlie interrupted.

  “Correct. Bitcoin is not just scarce like gold, but its supply is also fixed,” Voorhees said. “By the design laid out in Satoshi Nakamoto’s original white paper, there will never be more than twenty-one million bitcoins created, whereas the supply of gold increases as new deposits are discovered. And bitcoin is more divisible than gold. Each bitcoin can be subdivided into one hundred million pieces, and you can own as little as .00000001 bitcoin. And you can send it to someone instantly, like sending an email. Try emailing someone a bar of gold.”

  “It’s gold with wings, gold 2.0!” Charlie said.

  “All enforced by computer source code,” Tyler added.

  Charlie seemed to be so enjoying how things were going, he decided to reward himself by grabbing for a large bong.

  “Code is law,” Voorhees said. “Mathematical law.”

  “What prevents me from spending the same bitcoin twice?” Cameron asked. “If I can email the same picture to more than one person, what prevents me from doing that with my bitcoin?”

  “The double-spend problem,” said Voorhees.

  This was a unique issue for digital currency that did not exist in the physical world of cash. If you gave someone a twenty-dollar bill, you couldn’t turn around and then give another person the same twenty-dollar bill. In the digital world, however, where 1s and 0s were plentiful, there were no such physical limitations. Historically, this problem had always been solved by invoking some central authority—the Federal Reserve, Visa, MasterCard—that monitored transactions and made sure the same digital dollars weren’t spent twice by the same person. But Bitcoin had no authority, no referee. It was also known as the “Byzantine Generals’ problem” in computer science circles and was a problem that was thought to be unsolvable: How do you create consensus in a completely decentralized system?

  “That’s where this gets really cool.” Charlie looked up from his bong. “Satoshi solved the problem in his white paper, which started it all. The answer is what makes the whole Bitcoin system work: mining.”

  Cameron had only had a few hours of internet reading to wrap his thoughts around the “mining” system, which acted as the engine to the Bitcoin ecosystem. He still didn’t have a complete grasp of how it all worked—but what he already knew fascinated him.

  Voorhees explained how Bitcoin “miners”—people with computers running specialized software—validate and audit bitcoin transactions by solving complex math problems generated by the transactions themselves. Once a miner has solved the math puzzle for a new “block” of transactions, the block is added to the Bitcoin “blockchain,” the global ledger of every bitcoin transaction since the beginning of time. For their effort, miners were rewarded by the network with newly minted bitcoins. This is known as the “block reward.” And the more computing power a miner brings to the network, the greater the chance they have of solving the math problems and winning the block reward. The more you mine, the more likely you are to win.

  “Or to put it in more technical terms,” Voorhees said. “The greater a miner’s hashrate, the greater their chances.”

  Cameron had learned the term years ago, in a computer science class. Hashrate, or hashes per second, was a measurement of computational power: how many computations (i.e., hashes) a computer could perform in one second. Miners were furiously competing with one another to solve the mathematical problems that validated the current block of bitcoin transactions; the more these miners invested in their hardware—buying faster chips, housing their computers in coolant data centers, and so forth—the better their chances of winning a reward of newly created bitcoins. And then the race began all over again.

  In trying to understand the process, Cameron had actually come up with his own simple analogy, which he decided to share with the room:

  “Remember Charlie and the Chocolate Factory?” he started.

  Charlie burped out a cloud of smoke as he took a pause midway through his hit.

  “Never watch that movie high. The Oompa Loompas will scare the shit out of you.”

  “The little boy in the movie,” Cameron continued, trying not to be distracted by the real-life Charlie getting higher and higher next to him, “is looking for a golden ticket inside candy bars. Charlie is a like a miner. And the golden ticket, which will grant him a tour of Willy Wonka’s factory, is like the block reward. Now suppose that by searching for this golden ticket, Charlie is also simultaneously validating purchases of candy bars and recording them in the factory’s business ledger—the Willy Wonka blockchain. And suppose there are many Charlies all around the world doing the same thing, searching for that golden ticket. As they open Wonka bars, they are auditing the Wonka blockchain and checking one another’s work. Willy Wonka’s contest has miraculously incentivized children around the world to work together to validate and record transactions of Wonka bars, helping Willy keep track of who paid for what, thereby protecting his profits and ensuring that his factory stays in business and can continue to make chocolate for everyone.”

  Voorhees smiled.

  “That’s very good. And it perfectly illustrates the magic of Bitcoin. Instead of middlemen, or gatekeepers, you have an open competition of miners, individually incentivized to validate transactions. No bank or government sits in judgment of transactions, or takes a piece of each slice of pie. Middlemen are replaced with math, or in the case of your example, an army of Charlie Buckets.”

  “And the Willy Wonka of Bitcoin,” Tyler said. “Who set all of this in motion: Satoshi Nakamoto.”

  Cameron knew from his reading that the creator of Bitcoin was no less mysterious than the fictional character from his analogy. On October 31, 2008, Satoshi Nakamoto had published his famous white paper titled: Bitcoin: A Peer-to-Peer Electronic Cash System, to the Cryptography Mailing List—“a low
-noise moderated mailing list devoted to cryptographic technology and its political impact,” laying out “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” The white paper detailed bitcoin’s specific features:

  • Double-spending is prevented with a peer-to-peer network.

  • No mint or other trusted parties.

  • Participants can be anonymous.

  • New coins are made from Hashcash-style proof-of-work.

  • The proof-of-work for new coin generation also powers the network to prevent double-spending.

  And then three months later, the first version of the Bitcoin software was released into the wild. In thirty-one thousand lines of code, Satoshi was able to achieve what no one else before him had: the elimination of the need for trusted, central parties. On January 3, 2009, Satoshi verified the first Bitcoin block, block 0—the “Genesis Block.” Embedded in the Genesis Block was the headline of the London Times newspaper of that day:

  CHANCELLOR ON BRINK OF SECOND BAILOUT FOR BANKS

  The headline itself was a sobering reminder of human fallibility and the impact it had on the financial system.

  And soon after, Satoshi vanished, never to be heard from again.

  Over the years, numerous journalists had tried to track down the elusive founder, but they had very little to go on. Satoshi Nakamoto appeared to be a pseudonym. In Japanese, “Satoshi” meant “clear-thinking” or “wise,” while “Naka” meant “inside” or “relationship.” “Moto” was used to describe “an origin” or “a foundation.” Strung together, the made-up name translated to “thinking clearly inside the foundation.” Was it a clue? A mantra?

  Between his white paper, source code, blog posts, and emails to Bitcoin core developers, Satoshi had left a total of eighty thousand words behind on the internet, approximately the length of a novel. Yet despite all of this, he had left almost no personal clues. If he was a Japanese man, he wrote in idiomatic, flawless English that alternated between American spellings and British spellings. The time stamps of his writings revealed no particular time zone. Investigative journalists had named at least fifteen people as possible alter egos to the mysterious inventor, including Elon Musk, the Tesla billionaire, and Hal Finney, a game designer and cryptographer who had received the first Bitcoin transaction from Satoshi in 2009; but none of these leads had led anywhere.

  “To me,” Voorhees said, “the mystery surrounding Satoshi is a feature of Bitcoin, not a bug. The beauty of Bitcoin is that it is not built around Satoshi, it’s not built around anyone. To understand Bitcoin, you only need to understand Bitcoin.”

  Charlie coughed from behind an epic ring of pot smoke, then grinned.

  “Gravity doesn’t work because you believe in Isaac Newton.”

  * * *

  Ten minutes later, the group had moved out of the Bakery and back into the front office of the small startup, so Charlie could finish his guided tour.

  He was showing them some of his software, running on a pair of desktop computers. “Our company, BitInstant, is part of the Bitcoin economy’s gravity. Specifically, we’re in the business of helping people buy bitcoin in an easy way. We take their cash, turn it into bitcoin, and then send it to them—instantly.”

  “For a small fee,” Voorhees clarified, from behind Cameron and his brother.

  “See,” Charlie continued, “if you buy bitcoin on an exchange—and at the moment, just one exchange carries most of the Bitcoin business, almost ninety percent—you have to go through the pain of opening up an account, filling out paperwork, wiring money overseas, and so on—waiting weeks for your account to be approved, waiting days for your money to arrive—it’s a lot of heavy lifting. At BitInstant, we take care of all of that for you. You give us cash, we do the rest.”

  “You’re the cashier’s cage,” Cameron said. “You deal with the exchanges.”

  “Correct. We turn cash directly into coin. You give us cash, and we can put bitcoins in your virtual wallet in under thirty minutes.”

  “These ‘virtual’ wallets. Are they safe? From hackers? If you lose your phone, or your computer gets jacked—”

  “It’s like your bank vault was just carried off, Wild West style,” Charlie said. “You’re right, Bitcoin brings about different security concerns; the thing about Bitcoin, it’s digital but it’s also physical.”

  Charlie held up his left hand, and Cameron saw a glint of silver around the young entrepreneur’s pinky. Charlie carefully removed the ring and held it out so Cameron and his brother could see hundreds of tiny little alphanumeric characters etched along the inside of the ring.

  “Is that your private key?” Cameron asked. He was referring to the “password” that gave you control of your bitcoin. Each bitcoin private key was a 256-bit number that could be any combination of 1s and 0s. It was a 256-bit number that allowed 2^256 possibilities; put in perspective, that was more possibilities than there were observable atoms in the universe. The chance of someone guessing a private key was 1 in 115 quattuorvigintillion.

  “Almost, all but the last five alphanumeric characters, those are in my head.”

  “Did you imbed your private key on a ring yourself?”

  “Actually, my dad did. He’s in the jewelry business. I had him engrave it for me. I keep about twenty percent of my bitcoin right here, on my finger. This is what we call ‘cold storage’—offline.”

  “Is this really practical?” Tyler asked. “Can’t you just keep it on a USB drive? Put it in a safe somewhere?”

  “Sure. Put some on a USB. Leave some in a password-protected wallet on your computer. Put a bunch on a pinky ring. Hell, tattoo it on your arm. The thing is, we don’t really care what people do with their bitcoin. We just want to make it easy and fast for them to get them. Once they get their bitcoin, they should be free to do whatever they want with them.”

  Voorhees was nodding in agreement, and Cameron knew they were now touching on philosophy. The idea that people should be able to do whatever they wanted with their own money, independent of any government oversight, was a cornerstone of the libertarian ideology that had fueled much of the interest in Bitcoin up to that point. Early Bitcoiners were mostly made up of people like Voorhees, people who believed that nobody else should have a say in how individuals chose to act, as long as it didn’t hurt anyone else. It was a philosophy that could extend in some dangerous directions.

  “Storage is one thing,” Cameron said. “Commerce is something else. People aren’t buying just vodka and pizzas with bitcoin.”

  He glanced at the industrial-size bong across the room. Charlie laughed.

  “You’re talking about Silk Road.”

  It wasn’t exactly an elephant in the room of Bitcoin, it was the room itself. Silk Road was an infamous, online bazaar that allowed users to buy and sell illegal goods and services. Its growth into a multimillion-dollar business, a sort of Amazon for illicit drugs, had coincided with the growth of virtual currency, and to the people who knew about either of them, they were inextricably intertwined.

  “Not your typical due diligence,” Tyler said. “We checked out Silk Road. Not just drugs, but also guns, murder for hire. Pretty dark stuff.”

  It hadn’t been as simple as typing in a web address on his computer to get to Silk Road. Cameron and Tyler had needed to download special software called Tor to make their computer anonymous, and even then they’d felt concerned just browsing a few pages of the online bazaar. What they’d seen on the site was almost hard to believe. Page after page of mostly drugs for sale, complete with pictures. You could search for cocaine, heroin, marijuana; when you found what you wanted, you could buy it with bitcoin—and only with bitcoin—and have it delivered right to your doorstep.

  Although Voorhees, a dyed-in-the-wool libertarian, might have seen it as simply a place where people could shop without government intervention, Tyler and Cameron saw it as something different—something obviously criminal. Even the term “dark web,” the
online subterranean world where sites like Silk Road existed, gave them the creeps. The fact that this was a potential first use case for virtual currency was troubling and a major potential hurdle if Bitcoin was going to go mainstream—something that could render the innovation dead on arrival.

  “They also sell pretty good brownies,” Charlie said.

  “Silk Road is just a proof of concept,” Voorhees said. “You can buy and sell real world goods with bitcoin. Our job at BitInstant is one step removed. We help people get bitcoin, no more, no less.”

  Cameron had read enough of Voorhees’s opinions online to know that his views were much more fundamental than that: he was staunchly against the criminalization of drugs, of any sort of governmental regulation aimed at controlling how people behaved. In fact, when Charlie had hired him as BitInstant’s first real employee, he’d been living in New Hampshire, where he had moved as part of the Free State Project, a political crusade to populate the state with libertarian believers who were fighting for freedom from overbearing government. Voorhees appeared to be against most forms of taxation, most forms of military action, and many—if not most—financial laws. And yet, just a few years older than Charlie, he also seemed to be a practical, thoughtful businessman.

  “We’re already moving about two million dollars a month through our system,” Voorhees continued. “Three out of every ten bitcoin in existence were acquired through us, and that number is rising.”

  “We can’t keep on top of it,” Charlie said. “I’ve hired ten employees, but I need to double that, triple that. We’re going to be the Apple of Bitcoin.”

  Cameron had been through pitch meetings before, so he was no stranger to hyperbole, but he could tell Charlie wasn’t playing a part; this kid really believed he was hanging on to a lightning bolt. And why shouldn’t he? He had started the company in his mother’s basement, with the help of someone he had met online, a silent partner named Gareth Nelson, who was apparently autistic and still handled the technical aspects of the business from off-site—somewhere overseas. Charlie had begun by borrowing ten thousand dollars from his mother. It was just the kind of rags-to-billions story the tech world was famous for.