Digital Gold (17 page)

January 2013

R
oss Ulbricht was not the only Bitcoin entrepreneur who had gotten himself into something bigger than he could have ever imagined. In January Charlie Shrem's BitInstant was taking in over $250,000 in commissions each month on record transaction volumes.

But the growth obscured strains that were threatening to tear Charlie's company apart. The fights with David Azar that had started almost as soon as BitInstant took David's investment had grown worse and usually ended in a shouting match or a slammed-down phone. In December, Charlie and Erik Voorhees had looked to David's investment partners, the Winklevoss twins, to help foster a more productive relationship.

The brothers had been relatively hands-off after putting in their $550,000. But they had grown concerned from afar. The e-mail chains between Charlie and David signaled that the twins were not dealing with the cool, calculating entrepreneurs of their Harvard alumni circles. They saw that Charlie's initially attractive energy came with a distressing inability to concentrate on one
task. Between constant travel and media appearances, Charlie was relishing, perhaps too much, the elevated social status that Bitcoin was giving him. When Charlie did talk business, he often seemed more intent on selling the idea of Bitcoin than of his own company.

There was another more immediate problem that the twins hadn't bargained for. Earlier in the year, Erik and a friend he had brought into BitInstant, Ira Miller, had started an independent company called Satoshi Ltd. with a number of subsidiaries. One was a technology called Coinapult that BitInstant used to send Bitcoins via e-mail. Another, Paysius, allowed merchants to accept virtual currencies.

The Winklevoss twins asked how Erik and Ira could run those businesses at the same time that they were working full-time for BitInstant. Erik and Ira proposed solving the issue by merging Satoshi Ltd. with BitInstant in exchange for a higher equity stake in BitInstant—all that David and the twins had to do was give up 1.5 percent of their own stake in the company.

Around the New Year, Erik wrote up a lengthy strategy document listing how a merger could be handled, allowing the company to go after new markets like mobile payments in Africa and poker sites in need of payment networks around the world. The document reflected the team's big ambitions. Erik and Ira didn't want BitInstant to be just a place to buy Bitcoins. They wanted to offer all the services that banks did, in a new, cheaper, and more democratic way.

But the Winklevoss twins and David Azar were thinking in more immediate and practical terms. Glancing at the pages of long-term strategy, they blanched at the value that Erik and Ira assigned to Satoshi Ltd.

The twins wrote increasingly peeved e-mails to Charlie, pushing him to resolve the situation without giving in to Erik and Ira. The conversations between the twins and Charlie began to end
with the same sort of recriminations that had been so common between Charlie and David weeks earlier. Charlie and his team appeared to the twins like inexperienced entrepreneurs who didn't know how to put business interests above social and political allegiances. The Winklevoss twins, meanwhile, confirmed the fears of the BitInstant team regarding what happened when people who didn't care about the big principles underlying Bitcoin tried to make money in the space.

Charlie and Erik reached out to Roger Ver, Charlie's first investor, hoping he might be able to resolve things from Tokyo. Their idea was that Roger could buy out the stake that the twins and David had taken in BitInstant.

“My one hope was that perhaps the Winklevii would be far more helpful and productive, but a long insult-filled call between Cameron and Charlie today proved that my hope was naive,” Erik wrote to Roger in early January.

Charlie and Erik wrote a lengthy, acerbic letter to the twins, pleading for a resolution that would allow both sides to go their separate ways.

“If we're all being honest, then it's clear we neither need nor want your money, and you neither need nor want to be risking your money with a team that you believe to be childish and 2/3rds expendable,” the letter said. “Let's be gentlemen and move on. If you are so interested in building a Bitcoin business, and you are so skillful at navigating these waters, then I welcome you to go and do it.”

The twins considered selling to Roger. But they also believed BitInstant was a good idea that could work under the right management. In January BitInstant had its best month ever, processing almost $5 million in transactions. The price of a Bitcoin, meanwhile, had risen from $13 at the beginning of the month to around $18 at its end. Some of this was due to the twins themselves. They
had asked Charlie to continue buying them coins with the goal of owning 1 percent of all the Bitcoins in the world, or some $2 million worth at the time. This ambition underscored their commitment to sticking it out with Bitcoin.

The tension came to a breaking point at the end of January. Patrick Murck, the general counsel at the Bitcoin Foundation, flew in from Seattle to see if he could help Charlie and Erik make their argument to the twins. In a meeting in the BitInstant conference room, Charlie, Erik, and Patrick, sitting on one side of the table, offered to provide Maguire Ventures, the entity put together by David and the twins, with a full refund for the money they had put in. The twins responded angrily that they would accept no less than five times what they had put in. They also said that the technology being offered by Erik's company, Satoshi Ltd., was worth little. Erik and Ira responded by walking out of the room as the twins “continued with emotional insults and absurdities,” Erik wrote in an e-mail after the meeting.

The next day Erik and Ira sent in their resignations and moved into the offices of Larry Lenihan and FirstMark Capital; Lenihan had always been more interested in investing in Erik than in Charlie.

Charlie, Roger, and Erik were in constant conversation, contemplating whether Charlie should join Erik, and if the whole group should sue the Winklevoss twins. They ultimately decided not to sue—mindful of the way the twins had responded when Mark Zuckerberg left them out of Facebook.

Charlie decided he couldn't leave the company he created, but when he went to work the next day, he did not go in peace. He demanded that Maguire Ventures deliver the final installment of the investment it had agreed to make the previous fall:

“You guys are screwing up my company, and Ira and Erik left because of it. Give me my money or I will wire it all back to you today.”

Roger, who still had a 15 percent stake in the company, continued pushing the twins to sell their stake in the company or let Roger sell his:

You guys obviously don't understand Bitcoin, or BitInstant.

You are destroying your equity and mine, and I don't want to be any part of it.

If you disagree, then make me an offer for my 15% of BitInstant.

Name your price.

I will gladly sell it to you for less than the valuation you bought in at.

There was some confirmation of Roger's assessment a few days after Erik left, when Charlie got a letter from the latest bank to decide that it would no longer service BitInstant's accounts. It was unclear if BitInstant would have anywhere to put all the money customers were sending it. As the value of Bitcoin continued to shoot up, the value of Charlie's idea seemed to be falling apart before his eyes.

February 2013

T
he desk where Wences Casares worked on his digital wallet, Lemon, was mounted on a treadmill, in an office overlooking the main shopping street in Palo Alto. His monitor was perched on a short pile of books, hardcover copies of
Debt: The First 5,000 Years
. When he spoke about Bitcoin with visitors to the office and invariably began talking about the history of money, he would frequently give them a copy of the book.

Wences shared the space with Micky Malka, an old Venezuelan friend and business partner. Micky was a big investor in Lemon and chairman of the company's board. Wences was, for his part, one of the largest investors in Micky's venture capital firm, Ribbit Capital.

Micky's recently opened fund was technically focused on financial services. But after Wences got Micky excited about Bitcoin, Micky was trying to find virtual-currency investments. Because there were so few viable Bitcoin companies around, Micky made the somewhat controversial decision to use his investors' money to buy Bitcoins themselves.

Both Micky and Wences turned the office into a kind of virtual-currency salon, hosting a constant parade of interested visitors. Among them was Pete Briger, the chairman of Fortress Investment Group, who dropped by soon after the skiing trip, with his deputy Bill Tanona. Wences marveled at how quickly Pete had managed to get others at Fortress excited about Bitcoin, but when he heard Pete speak about it he understood why. Pete, a normally reserved man, got fired up when talking about the inefficient “oligopoly” that the big banks had over money movement and the transaction fees that the oligopoly forced everyone else to pay. Wences was getting more of a response from Fortress—a Wall Street giant managing nearly $60 billion—than he was from Silicon Valley venture-capital firms with just a few hundred million dollars. Pete assigned Tanona to the almost full-time job of exploring potential Bitcoin investments, and also drew in another top Fortress official, Mike Novogratz. All of them began buying coins in quantities that were small for them, but that represented significant upward pressure within the still immature Bitcoin ecosystem.

The purchases being made by Fortress—and by Micky's team at Ribbit—were supplemented by those being made by the Winklevoss twins, who were still trying to buy up 1 percent of all the outstanding Bitcoins. Together, these purchases helped maintain the sharp upward trajectory of Bitcoin's price, which rose 70 percent in February after the 50 percent jump in January. On the evening of February 27 the price finally edged above the long-standing record of $32 that had been set in the hysterical days before the June 2011 crash at Mt. Gox.

O
N THE AFTERNOON
of Sunday, March 3, Wences boarded a Gulfstream two-engine jet at a private airport in San Jose favored by the Silicon Valley elite.

Wences was headed to one of the most exclusive, and secretive, annual gatherings of tech-industry power players, held at the Ritz-Carlton resort outside Tucson, Arizona, and hosted by the investment bank Allen & Co. Only a few hundred people were invited and it was private enough that the news media rarely even found out it was happening.

Wences flew to the conference on eBay's private jet. eBay owned PayPal, the company headed up by Wences's good friend David Marcus, and David was among the twelve passengers on the flight. He had been quietly working to make sure PayPal was ahead of the curve on virtual currencies and had pulled together a group in-house to look at how PayPal might harness the Bitcoin technology. He had also begun to talk about it with his boss, John Donahoe, the chief executive of eBay.

When the eBay jet touched down north of Tucson, the passengers were quickly whisked away in SUVs to the Dove Mountain Resort, which sat in the foothills of the mountains that separate Tucson and Phoenix. That evening, everyone congregated for drinks on the Tortelita Terrace and then proceeded to dinner on an immaculately maintained lawn overlooking the scrubby mountains.

This was the most casual dinner of the three-day event, with unassigned seating and a buffet to accommodate the guests arriving at uneven intervals. Wences took notice as the big names showed their faces: Twitter's chief executive, Dick Costolo; LinkedIn's founder Reid Hoffman; Rupert Murdoch's son, James; and perhaps the most recognizable venture capitalist in Silicon Valley, Marc Andreessen, an enormous man with a shiny bald head.

Wences found his way to a table with another budding Bitcoin nut, Chris Dixon, one of the up-and-coming stars at Andreessen's firm, Andreessen Horowitz. The men quickly began comparing ideas. Dixon explained that he had gotten excited about the importance of the blockchain protocol as a new way of moving value
around the world, just as the Internet protocol had provided a decentralized way to move information. Dixon had been pushed to think about this by the writings of Fred Wilson, the New York venture capitalist who had backed Wences's first big company.

Wences smiled with gratitude to find someone who had seen the beauty of the system without his help. Wences, in turn, told Dixon about the international potential he saw for Bitcoin, in countries like Argentina where people lack a safe place to keep their money. Dixon hadn't thought much about that opportunity and asked Wences to tell him more.

They were interrupted by Henry Blodget, a former Wall Street analyst and founder of the news site
Business Insider
, who asked what they were talking about: he had never heard of Bitcoin. Wences responded with his favorite introductory line: “It's the best form of money the world has ever seen.”

Blodget's famously childlike curiosity provided a great opening for Wences to work through all of his finely honed arguments.

After touching on the history of money and Bitcoin's advantages over gold, Wences explained his back-of-the-envelope calculations of what Bitcoin might be worth if people began to realize its value as a substitute for gold. All the gold in the world was worth around $7 trillion. If Bitcoin became even half as popular, that would put the value of each Bitcoin at around half a million dollars—or about fourteen thousand times more than its $34 value that day in March.

The conversation continued as the sun went down and the desert air grew chilly. The little crowd around Wences's table grew, with Marcus and others stopping by.

Wences saw the interest build when he told one of his newest stories from Argentina. A friend of his sister had recently wanted to buy an upscale $1.5 million apartment in Buenos Aires. As with most Argentinian real estate transactions, the seller—distrustful
of the peso—wanted the payment in dollars and in cash, no small feat when the sum was $1.5 million. The bigger problem was that the sister's friend, like many wealthy Argentinians, kept his savings in dollars in an American bank account. To transfer the money into an Argentinian bank and then take it out in cash would eat about 10 percent of the money in bank and exchange fees—some $150,000—and would involve several days of waiting. To get around this, the sister's friend purchased $1.5 million worth of Bitcoins from Mt. Gox. Once the friend had the coins, he took his Bitcoin wallet to the signing for the apartment in Buenos Aires and transferred it over to the seller, with the notary as witness. Afterward, Wences's sister sent him a picture of the two old men holding up their smartphones and smiling.

To prove how easy this all was, Wences asked Blodget to take out his phone and helped him create an empty Bitcoin wallet. Once it was up, and Wences had Blodget's new Bitcoin address, Wences used the wallet on his own phone to send Blodget $250,000, or some 6,400 Bitcoins. The money was then passed to the phones of other people around the table once they had set up wallets. Anyone could have run off with Wences's $250,000, but that wasn't a risk with this particular crowd. Instead, as the money went around, Wences saw the guests' laughter and wide-eyed amazement at what they were watching.

The next two days were filled with panels covering topics like “eBay and Innovation” and “China: The Road Ahead.” In the afternoon there were scheduled activities: tennis, horseback riding, and clay-pigeon shooting, among others. During the interludes Wences was approached constantly by people who had heard the Sunday evening conversation or heard about it. LinkedIn founder Reid Hoffman pulled Wences aside to ask more, as did Michael Ovitz, the former president of Disney. During a hike on Wednesday afternoon, Wences spent the entire time explaining the concept
to Charlie Songhurst, the chief of strategy at Microsoft. At night, many of the same people approached David Marcus. As the president of PayPal, he would have as informed a view as anybody on the viability of Bitcoin.

“What do you think of this?” they asked him. “Is this real?”

Marcus replied that he already believed in the idea enough to put his own money into it. They shouldn't invest money they couldn't afford to lose, he said, but it was certainly worth some investment.

On Monday, the first full day of the conference, the price of Bitcoin jumped by more than two dollars, to $36, and on Tuesday it rose by more than four dollars—its sharpest rise in months—to over $40. On Wednesday, when everyone flew home, Blodget put up a glowing item on his heavily read website,
Business Insider
, mentioning what he'd witnessed (though not specifying where exactly he'd been, or whom he'd talked to):

I was at a technology conference earlier this week, and the most popular topic of casual conversation was Bitcoin, the electronic currency invented and unleashed a few years ago.

One of the things that's most fascinating about Bitcoin, I have learned, is that it entrances fanatical conspiracy theorists, clear-eyed pragmatists, and diehard skeptics alike.

Songhurst, the Microsoft head of strategy, who had learned about Bitcoin during his hike with Wences, wrote up a paper and circulated it among some of the most powerful investors in Silicon Valley, channeling Wences's arguments:

We foresee a real possibility that all currencies go digital and competition eliminates all currencies from non-effective governments. The power of friction-free
transactions over the internet will unleash the typical forces of consolidation and globalization and we will end up with six digital currencies: US Dollar, Euro, Yen, Pound, Renminbi, and Bitcoin.

The question then becomes, is Bitcoin viable if the government digital ledger systems are just as good? We think yes, for two reasons:

       
1.
 
There will always be transactions for which “official money” is less good than Bitcoin

       
2.
 
If you live outside the US, it is dangerous to have all your money controlled by a state where you have no rights.

In three days, Wences had reached more powerful people than Bitcoin had in its previous four years of existence.

D
ESPITE THE SURGE
of excitement, the interest Wences was encountering was still far from uniformly positive. More than a few people in Arizona left unconvinced that the technology would work and survive government scrutiny. Much of this skepticism had the same root as the excitement, and that was Silicon Valley's defining, and cautionary, experience with financial technology: PayPal.

PayPal, of course, still existed, owned by eBay and run by Wences's friend David Marcus. But what made people wary was not the current incarnation of PayPal, but instead the company's early days, when it had ambitions to be something much bigger.

PayPal had been founded back in 1998 by Peter Thiel and Max Levchin, among others. Thiel was an avid libertarian, who had wanted to use Levchin's cryptographic expertise to fulfill the Cypherpunks' dream of sending money through encrypted
channels, between private individuals and in particular between mobile devices like the PalmPilots of that time. In early staff meetings, Thiel gave speeches that could almost have come from the Cypherpunk mailing list.

“PayPal will give citizens worldwide more direct control over their currencies than they ever had before,” he said.

PayPal grew quickly, but in 2001, as the company readied for an initial public offering, it hit roadblock after roadblock from lawmakers concerned about the possibilities for money laundering and other illegal activities. New York Attorney General Elliot Spitzer said PayPal was breaking the law by facilitating payments for gambling companies, and the Department of Justice decided PayPal was violating the USA Patriot Act. The new limits and restrictions imposed took it further and further from its ambitious original goals. Thiel and Levchin left PayPal soon afterward.

This had scared much of Silicon Valley away from tinkering with finance, which was seen as largely resistant to new technology because of all the regulations. But the PayPal experience also explained why there was a hunger for the idea of a virtual currency. There was a lingering memory of this unfulfilled dream of Silicon Valley. While the Internet had freed information and communication from the postal service and the publishing industry, the Internet had essentially never disrupted money, and dollars remained bound by the old networks run by the credit card companies and the banks.

In the month before the Arizona conference, Thiel himself had been poking around in the virtual-currency space once again, looking for projects that might take advantage of the blockchain, without getting too bound up in a currency that could piss off government officials. Chris Dixon, Wences's conversation partner at that Arizona dinner, had also been agitating to get his firm, Andreessen Horowitz, to look at cryptocurrency startups and had been finding a receptive ear in his boss, Marc Andreessen.

They had both found their way to the new company being created by Jed McCaleb, the original founder of Mt. Gox. Jed's new company, named Ripple, was a cryptographic network that could be used to send any currency, not just Bitcoins. That made it less threatening to governments and banks and more attractive to people like Andreessen and Thiel, who both offered small seed investments.