Bitcoin is a tricky subject. The concept behind the digital currency can be difficult to explain to someone for the first time, and its history—barely six years old—is already fraught with controversy, starting with the true identity of Satoshi Nakamoto, author of the first bitcoin code.
That’s why Digital Gold, the new book from journalist Nathaniel Popper, is an impressive accomplishment. No, it doesn’t clear up the mystery of Satoshi Nakamoto, though Popper clearly has a favorite candidate for the role. But the book (you can find an excerpt from it here) is a lucid guide to the heady mix of innovation, ideology, avarice, and accident behind the burgeoning world of bitcoin, depicting the key players as they encounter and evangelize the new technology. And it does all this without getting drawn into the hyper-optimism or deep cynicism that seems endemic to commentary on bitcoin.
What it doesn’t do is make the topic any less complicated. Here are five wrinkles that Popper adds to the bitcoin narrative:
While many bitcoin accounts start with Satoshi, Popper traces the early experiments in digital currency that grew out of a “cypherpunks” listserv in the nineties. Concerns about government surveillance animated their early forays into decentralized, digital currency, but bitcoin’s pseudonymous creator didn’t initially come off as an ideologue. (For example, the much-hyped hard limit on the number of future bitcoins was a late addition to the currency’s codebase.) But Satoshi Nakamoto and an early collaborator, Martti Malmi, saw the advantage to hyping the techno-libertarian implications of the currency as a way of attracting the new users they desperately needed.
Divisions between those who want to emphasize the ideological power of bitcoin, versus those who want to emphasize its technological and business potential, continue to separate the currency’s fans. “Bitcoin is a movement, and those trying to distill it into nothing more than a cute new technology are kidding themeslves and doing a terrible disservice to this community,” Erik Voorhees, an early bitcoin entrepreneur, wrote to other developers. But despite this cri de couer, others, including influential attorney Patrick Murck and big-money investors, are downplaying the ideology in what’s been a successful effort to win the support of government officials.
While it got started on grassroots appeal, as Popper traces, the value of bitcoin only really took off when the ultra-wealthy became convinced the currency had potential. Millionaires like Facebook litigants Cameron and Tyler Winkelvoss; Peter Briger, the co-chairman of Fortress Investment Group; entrepreneur Wences Casares; and former PayPal executive David Marcus all poured money into the currency in 2013. At that point, the price really started to rise even as transaction volume remained steady. Marcus, now at Facebook, was so enamored that he considered quitting PayPal to start a bitcoin exchange. The book gives Cameron Winkelvoss credit for driving the price of bitcoins high enough that their total value broke $1 billion. (Today, the market value of all bitcoin is approximately $3.4 billion.)
Indeed, Popper describes the existence of what may be the most valuable laptop in the world: It contains the encyrpted private keys to bitcoin wallets owned by Casares, Marcus, Briger, and others, and is stored at a secure data center in Kansas City, unconnected to the internet and thus safe from hackers. The codes to de-crypt the keys are kept in a safety deposit box in Buenos Aires.
One frequent problem for early bitcoin businesses were their founders—almost all of them lacked either the skills to protect their companies from hackers, or the management acumen to hire people who did. Reading about the failures of Mt. Gox, where founder Mark Karpeles simply didn’t keep track of a hacker siphoning away his bitcoin reserves, or BitInstant, where Charlie Shrem spent so much time on extra-curricular activities that his attorneys threatened to quit if he didn’t start dealing with mounting legal problems, it seems all the more amazing that bitcoin is thriving as much as it is today. You can imagine success would have come faster with a planned collaboration between Fortress and Wells Fargo to launch a bitcoin exchange—it was scotched was after Shrem was arrested for his part in providing bitcoins to users of the bitcoin-fueled drug market Silk Road.
Even Ross Ulbricht, the “Dread Pirate Roberts” behind Silk Road, was found out thanks to a careless mistake—a single post connecting his anonymous internet identity with his real e-mail account. It was stumbled upon by an IRS agent.
Americans are a bit spoiled with choice when it comes to moving their money around; there are plenty of different investemnt options and few capital controls in the US. But in countries like Argentina and China, where taking money out of the country is restricted, bitcoin’s existence feels all the more vital. Casares, an Argentine, is at the center of the book, and you can read more about him in an excerpt from the book that ran last week. Also important is the rise of bitcoin in China, where eager buyers have buoyed the market for the currency.
Most interesting is the difference between US and Chinese regulators: While China’s government initially permitted a much freer bitcoin market than the US, it quickly came to prohibit the technology’s interaction with payments systems. In the US, prosecutors have gone after individuals for using bitcoin to break the law, but the technology has been increasingly accepted by regulators and the mainstream financial system.
The challenge of writing a comprehensive book is that you can miss out on current events; because the narrative in the story finishes up in the summer of 2014, it ends on a high note—and we miss out on the currency’s massive plummet to the current price, around $234 per bitcoin. The question of whether bitcoin needs to be intrinsically valuable to succeed is an open one, as is the question of whether bitcoin will succeed in becoming more widely used as a currency or as a payments system.
Venture capitalists have sunk millions of dollars into the second generation of bitcoin companies, and now they wait. But if the price isn’t going their way at the moment, these entrepreneurs can point to one important metric: The number of transactions per day is finally on the rise.