Digital Gold (19 page)

In New York, Charlie got an e-mail from one of BitInstant's lawyers: “I don't think this is good for the community.”

But for the broader Bitcoin universe, the basic message of the guidance was encouraging: the United States government was not planning to come in and shut down the virtual currency. The next day the price of Bitcoin surged from $52 to $59, and by Thursday it was above $70.

The financial crisis sweeping Europe added yet another boost to the price. The banks on the Mediterranean island of Cyprus were on the verge of collapsing in mid-March when European authorities put together a bailout plan. The hitch was that all savings in Cyprus's banks were to be docked by 10 percent. The government, in other words, was confiscating money from private bank accounts.
BusinessWeek
ran a story that conveyed the seeming promise of Bitcoin: “B
ITCOIN MAY BE THE GLOBAL ECONOMY
'
S LAST SAFE HAVEN
,” the magazine's headline said. Russians who kept their money in Cyprus's banks were rumored to be buying up Bitcoin, which no government could confiscate.

The prices certainly suggested that someone with lots of money was buying. In California, Wences Casares knew that no small part of the new demand was coming from the millionaires whom he had gotten excited about Bitcoin earlier in the month and who were now getting their accounts opened and buying significant
quantities of the virtual currency. They helped push the price to over $90 in the last week of March. At that price, the value of all existing coins, what was referred to as the market capitalization, was nearing $1 billion.

On March 27 the forums and the news site Reddit lit up with calculations of what value, for a single coin, would take the market capitalization over $1 billion, and the number settled on was $91.26. This calculation was largely theoretical: most of the outstanding coins had been purchased for pennies or a few dollars in the early years, and if everyone tried to sell for $91, the price would plummet. But it marked a psychological line in the sand that was, if nothing else, fun to talk about. That day, Cameron Winklevoss, who had taken responsibility for the twins' buying and selling of Bitcoins, was watching the price closely, first from the twins' office and then from home. After midnight, as he was preparing to go to bed, he saw the price approach the magical border of a billion. As the number crept closer and closer, he placed a small order on Mt. Gox that would be executed only if the seller agreed to a price above $91.26. The order was quickly filled and he watched the value of a Bitcoin on Mt. Gox—determined by the last order—jump to $91.27. Twitter and Reddit went wild. The next morning, Cameron gleefully reported to Tyler that it was their money that was responsible for sending the value of all Bitcoin over $1 billion for the first time.

March 2013

T
he surging price of Bitcoin helped bring out of the woodwork some of the early Bitcoiners who had dropped from view.

In February,
Martti Malmi posted an entry on his company's website describing his early days in Bitcoin. A month later, Hal Finney recounted his own story on the Bitcoin forum. By this time, his ALS had progressed to the point where he was essentially paralyzed, relying on tube feeding and a respirator. He spent most of his time in the same living room where he'd first worked on Bitcoin four years earlier, his old computers stacked up on the desks around him. But Hal could still communicate and type using a computer that tracked his eye movement, and he diligently worked on a few coding projects and regularly checked in on Bitcoin to see how his pet project was doing. As he watched the price go up, he asked his son to burn the private keys to his Bitcoin wallets onto a DVD, and put the DVD in a safe-deposit box at a bank. Some of his coins, though, he had his son sell, in order to pay for all the medical care he needed to stay at home.

“I'm pretty lucky overall,” Hal wrote. “Even with the ALS, my life is very satisfying. But my life expectancy is limited. Those discussions about inheriting your Bitcoins are of more than academic interest. My Bitcoins are stored in our safe deposit box, and my son and daughter are tech savvy. I think they're safe enough. I'm comfortable with my legacy.”

T
HIS SHOULD HAVE
been the best of times for the existing Bitcoin businesses, and in certain ways it was. In March alone, sixty thousand new accounts were opened on Mt. Gox, and the monthly trading commissions rose above $1 million for the first time ever, more than triple what they had been a month earlier.

But even after all their earlier struggles, the staffers at Mt. Gox were not ready for this surge in business. Mark Karpeles now had a staff of eighteen, and a deputy with real business experience, whom he put in charge of all the company's dealings with the outside world. But Mark gave this deputy no power over the company's actual operations and kept firm control of Mt. Gox's essential accounts. Mark also continued to struggle with prioritizing his responsibilities. He was two years into running the world's largest Bitcoin exchange, but he had still not attended a single Bitcoin event abroad—a fact that he blamed on the sickness of his cat, Tibanne, who needed daily shots that Mark believed only he could administer.

Meanwhile, in late 2012 Mark had agreed to hand over his American customers to Peter Vessenes and his company CoinLab, which had an American bank account. But when it came time to hand over the customer files in March, Mark flinched, worried about some of the terms in the contract he had already signed. This left Mark's customers relying on Mt. Gox's Japanese bank, which put strict limits on the number of wires the company could send
out each day. Even the simple task of opening an account with Mt. Gox required a three-week wait for approval from Mark's team.

For BitInstant and other companies that had to work with Mt. Gox, the reason behind the problems seemed simple: sheer incompetence. Charlie Shrem's BitInstant was now the main driver of trading volume to Mt. Gox, but when there were problems Charlie's e-mails to Mark Karpeles would go unanswered for days or even weeks.

Wences Casares had never fully trusted Mt. Gox and had been looking for a better place to store his coins. When he put them into his own digital wallet, he realized that all his private keys—the signature that allowed his coins to be spent—were sitting on his computer or phone, waiting for the first hacker who got access to his computer. Someone who had the private key for one of Wences's Bitcoin addresses could, essentially, impersonate Wences. Wences decided to work on a system with his Argentinian friend Fede Murrone to store their private keys out of the reach of hackers. They started by putting all their private keys on a laptop, with no connection to the Internet, thus cutting off access for potential hackers. After David Marcus, Pete Briger, and Micky Malka put their private keys on the same offline laptop, the men paid for a safe-deposit box in a bank to store the computer more securely. In case the computer gave out, they also put a USB drive with all the private keys in the safe-deposit box.

C
HARLIE HAD KEPT
BitInstant ahead of the regulatory curve. Back in 2012 he had registered the company with FinCen as a money transmitter. In March, though, the company was still trying to bounce back from the departure of Erik Voorhees and his friend Ira Miller, who had moved to Panama to develop their own company after the falling-out with the Winklevoss twins.

The new team Charlie brought on immediately spotted significant flaws in the way the company was being run. For starters, Charlie was the only one with access to the company's bank accounts. Many day-to-day operations required Charlie to manually intervene. The new lead developer called for the entire site to be taken down and rebuilt. But there wasn't time as new customers were pouring money into the site. The new staff members were jammed into every corner of the small offices Charlie and Erik had moved into the previous summer.

On top of the internal problems, Charlie was also having trouble finding a reliable bank account, even as a registered money transmitter. Since the end of 2012, Charlie had opened accounts with KeyBank, PNC, Wells Fargo, and JPMorgan Chase—and all of them had been shut down. It became apparent to others in the company that Charlie had not been entirely up-front with the banks about the nature of his business. Charlie had generally opened the accounts without explaining that BitInstant customers would be depositing and withdrawing money on a daily basis. When the banks saw the thousands of transactions every day—a strain on their compliance officers—they decided the BitInstant business wasn't worth it.

This pointed to a broader issue with Charlie that was frustrating the Winklevoss twins and was clearly an outgrowth of his childhood desire for acceptance. Charlie loved telling people what they wanted to hear. He would always give the twins optimistic predictions for projects and would fail to alert them to impending problems until the last moment, in the hope that the problems would go away. This optimistic approach was great for a salesman, and Charlie had been a great salesman. But it was not such a great habit for a manager, who needed to find a way to deal with problems, not ignore them.

Given the issues at Mt. Gox and BitInstant—the two longtime giants of the Bitcoin world—investors and entrepreneurs in Silicon
Valley were looking for alternatives. As an alternative to Mt. Gox, people saw some promise in Bitstamp, an exchange that had been founded by a Slovenian college student and a family friend back in 2011 and that had been growing slowly ever since. Wences and Micky sent one of Micky's deputies to Slovenia to scope out the operations. The youngsters running Bitstamp looked like an Eastern European boy band, with their long hair and penchant for Adidas track suits. But their evident competence—particularly when they were compared with Mt. Gox—generated so much confidence that Wences and Micky began moving their trading to Bitstamp. Mt. Gox still had 80 percent of all Bitcoin trading, but Bitstamp's market share began to creep up.

For those looking to buy smaller quantities of Bitcoin—BitInstant's specialty—people found their way to Coinbase, a San Francisco–based startup that had been opened by a veteran of Airbnb and a former trader at Goldman Sachs at the beginning of 2013. The company had managed to interest several investors and had maintained a bank account with Silicon Valley Bank. But even with Coinbase executives at the bank made it clear that the Bitcoin business was testing their patience. In order to stay on top of anti–money laundering laws, the bank had to review every single transaction, and these reviews cost the bank more money than Coinbase was bringing in. The bank imposed more restrictions on Coinbase than on other customers because Bitcoin inherently made it easier to launder money. A terrorist could potentially put dollars into Coinbase, buy Bitcoins, and then use the blockchain to send those Bitcoins to terrorist cells overseas. Because there is no identifying information attached to Bitcoin addresses, the terrorist cell could receive money without anyone noticing. That is very different from a traditional bank, in which every account is tied to a specific person or organization. Coinbase had to repeatedly convince Silicon Valley Bank that it knew where the Bitcoins leaving
Coinbase were going. Even with all these steps, on several days in March Coinbase hit up against transaction limits set by Silicon Valley Bank and had to shut down until the next day.

At the end of the month, an item was posted on SVBitcoin, an invite-only e-mail list for the Silicon Valley Bitcoin community: “The Time Has Come for the Bitcoin Community to Own a U.S. Based Federally Chartered Bank.”

The author, an investor named David Johnston, wrote that the skepticism of traditional banks toward virtual currencies was the biggest roadblock facing Bitcoin's growth. If people couldn't send dollars from their bank to BitInstant or Coinbase, the surging interest in virtual currencies would be snuffed out.

The community was hitting a roadblock that almost every movement striving to disrupt the status quo eventually reaches. The big ideals of Bitcoin had carried it a long way and were sound in theory, but eventually the community required some cooperation from the existing authorities—people needed the old banks to agree to move their money into the Bitcoin realm. This was like an anarchist commune that ran up against the unwillingness of local officials to continue delivering water and electricity. Such collisions with the recalcitrant real world are frequently where utopian schemes run into trouble.

Johnston estimated that purchasing a licensed bank that could specialize in Bitcoin companies would require something like a $10 million investment up front. He offered to put up $1 million himself—thanks to the big rise in his own Bitcoin holdings—and he sought out ten more investors to join him. Charlie quickly wrote back saying it was a great idea. Wences responded next, offering to help fund the venture.

But there wasn't time for any big changes. On April 1, 2013, the price of a Bitcoin crossed the $100 threshold, a 670 percent increase since the beginning of the year.

The price moves were now feeding on themselves, as speculators chased the climbing ticker, fueled by news articles from all the new acolytes, many of them tutored by Wences. Jeremy Liew, a venture capitalist at the firm Lightspeed Capital, which had money in Wences's current startup, wrote an article in TechCrunch explaining that:
“As a VC, my interest in the
Bitcoin
ecosystem is not ideological but mercenary. I see the opportunity for Bitcoin to disrupt multi-billion-dollar markets, but in doing so also create new big markets.”

Within the companies handling all the money, however, the gaskets popping and wood warping were once again audible. Charlie didn't have enough money at Mt. Gox to fill all the orders coming in. On April 5, with the price moving above $140, he asked the Winklevosses for a short-term loan of $500,000 so that he could increase his reserves.

“I really wanna make 4pm wire cutoff so I can make sure we have enough money for the weekend in our accounts!” Charlie wrote feverishly.

When they quickly sent over the funds, he wrote back: “Thanks guys, you are amazing.”

Charlie was also running into issues at Mt. Gox, where he purchased many of the coins that he sold to BitInstant customers. With orders pouring in, Mt. Gox was so backed up it was taking half an hour for trades to go through. This exacerbated the price swings as people who thought they were buying at $160 weren't getting their coins until the price was at $175.

To compound matters, Mark Karpeles chose this moment to move ahead with big changes in some obscure but important codes that customers used to transfer money around, and did not fully brief customers—even big ones like BitInstant—on how to cope with the changes. This set off a set of increasingly panicked e-mails between Tokyo and New York.

“You have been throwing us around like you always do,” Charlie wrote to Mark on April 9. “Beating around the bush and not being up front with us.”

When Mark responded without answering Charlie's basic question about some necessary coding language, Charlie exploded: “
IF WE CANNOT ACCEPT MTGOX ORDERS WE ARE VIRTUALLY SHUTTING DOWN
.”

“Someone help us!!!!” Charlie wrote on the morning of April 10.

That same day, the mania peaked when the price for Bitcoins on Mt. Gox surged to $260. In the first ten days of the month, the exchange had attracted 75,000 new accounts. On April 10 the number of trades coming in was three times higher than it had been just a day earlier. For a trade, the lag between being entered and being executed was more than an hour. As people sat waiting for their orders to go through, they saw the price shoot up and panicked, not wanting to pay $300 when they had intended to pay $200. Orders were canceled and people began to sell, hoping to lock in the profits they had realized over the past months. The effect was predictable. While Charlie was asleep in New York the price began crashing, and by the time Charlie showed up at the office, the price was down to $200. By lunchtime it was closer to $100.

The BitInstant engineers congregated with their laptops on the small black sofa and chairs in Charlie's office. Charlie had a bottle of rum on his desk and, in a spirit of good fun, was taking occasional swigs as everyone tried to figure out just what was going wrong. Even the wireless network in the office was failing because of the number of people in the building trying to help. When Yifu Guo, the creator of the Avalon mining chips, stopped by the office, Charlie was in a state of giddy panic, both scared and amused.

“I'm flipping out. I'm yelling at everyone. Yifu, I'm drinking the rum from the bottle,” he said with a laugh.

“I don't know why you guys are all freaking out,” Yifu said, chuckling himself. “I'm not worried. The price is fine. It's time to buy.”