The sun rose over the hills dotted with oak trees east of San Francisco on a clear and chilly morning. It was New Year’s Day 2014, a year that would bring the disgrace of comedian Bill Cosby and the appointment of Janet Yellen as the first woman to head the Federal Reserve. Overseas, the US was confronting the rise of a terrorist group called ISIS, while at home, gay couples filed court appeals for the right to marry. In Silicon Valley, tech investors made their first investments in a mattress-in-a-box company called Casper and a quirky work tool call Slack, while Forbesmagazine would hail a ride-hailing service called Uber as one of the hottest startups of the year. And as Brian and the Coinbase crew shook off their New Year’s hangovers, San Francisco still buzzed about bitcoin.
The digital currency had pulled back from its giddy high of $1,100 in December, but still bounced around near $800—an astonishing development given that one bitcoin had sold for $13 at the start of 2013. Better yet, the regulatory cloud around bitcoin had started to lift after a lawyer named Patrick Murck had testified before the US Senate in November of that year about the benefits of a decentralized digital currency. To the surprise of many, the senators expressed interest and even encouragement about bitcoin. For Murck, who testified as general counsel of a new group called the Bitcoin Foundation, the hearing was the culmination of a year’s hard work. Murck and an oddball assortment of other bitcoin advocates had launched the foundation as a sort of crypto chamber of commerce, pushing to bestow an air of respectability on Satoshi’s creation.
It was not just bitcoin flourishing. Other cryptocurrencies had emerged with fan bases of their own and, like bitcoin, could be exchanged for real-world money. These included Litecoin, the offshoot of bitcoin created by Coinbase’s Charlie Lee, but also off-the-wall creations like Dogecoin—a novelty currency inspired by a feel-good meme about a Shiba Inu dog, but which nonetheless became worth tens of millions in real-world dollars. Meanwhile, a visionary pro-grammer named Jed McCaleb, who’d founded the world’s biggest crypto exchange, helped launch a versatile currency called Ripple before hatching another one called Stellar. Today, Ripple and Stellar are together worth over $10 billion.
Meanwhile, competition had come for Coinbase. Barry Silbert, the company’s early investor, launched a company called Grayscale that sold bitcoin in the form of shares in a trust, which allowed investment funds—whose bylaws forbade them from buying it directly—to acquire exposure to bitcoin. That wasn’t all. Cameron and Tyler Winklevoss, the twins who had parlayed their Facebook fortune into a bitcoin hoard, had backed a startup called BitInstant. Like Coinbase, BitInstant offered ordinary consumers an easy on-ramp to the world of crypto as well as a service for merchants to accept bitcoin. Unlike Coinbase’s cold, “Vulcan banker” Brian, its CEO was a gadfly twenty-four-year-old with a propensity for hard partying and who sat as a vice chair of the Bitcoin Foundation. And in late 2013, a group of venture capitalists made a big bet on a company called Circle to challenge Coinbase, while Xapo—the service that stored bitcoin under a mountain—launched an easy-to-buy cryptocurrency tool as well.
Even if Coinbase had more competitors than ever before, it hardly mattered during the bitcoin bonanza of early 2014. A flood of first-time bitcoin customers meant the pie was growing and there was enough for everyone. For Coinbase, which took a cut of every purchase, the rush of newbies also meant a surge of revenue. The monthly numbers read way up and way to the right: a 7,000 percent annual increase in customers. Meanwhile, Adam White, the indefatigable fighter jet veteran, persuaded more and more merchants to accept bitcoin. And it was no longer just obscure fro-yo vendors signing up. In a blitz of salesmanship, White also persuaded a series of giants, including Overstock, Expedia, and Dell, to try out cryptocurrency. Not long afterward, he added to the coolness cachet of Coinbase by signing a contract for the company to provide bitcoin services to Burning Man, the drug-fueled techie bacchanalia that takes place in the Nevada desert every August.
All of the merchant sign-ups, combined with the roaring consumer market, meant 2014 should have seen Coinbase post-growth results resembling a hockey stick worthy of Wayne Gretzky.
It didn’t happen.
• • •
In early February, a young Frenchman named Mark Karpelès sat in a Tokyo apartment with Tibanne, his orange-and-white tabby cat. He was nervous. A social misfit, he had become famous in crypto circles as MagicalTux, the online handle he used to run Mt. Gox, the biggest bitcoin exchange in the world. He had not started Mt. Gox. That had been the work of the coder Jed McCaleb, who had launched the site to trade cards for the game Magic: The Gathering. Hence the name: Mt. Gox stood for Magic the Gathering Online Exchange. But McCaleb soon repurposed the site for users to swap bitcoin rather than cards, before selling Mt. Gox to Karpelès in 2011. Karpelès, despite his awkwardness, built Mt. Gox into a colossus, accepting wire transfers from across the world as his site became the preeminent destination for bitcoin. He also became a director of the Bitcoin Foundation. By 2013, 70 percent of all bitcoin buying and selling took place on Mt. Gox. But on this February day, Karpelès was nervous—and for a very good reason.
As he sat stroking his cat, a barrage of emails and Reddit messages flared on his computer screen, all asking the same question: Where is my money? The messages had been coming at him for days, each wave angrier and more insistent than the last. Karpelès knew the answer to their question. It was simple: the money was gone. And the money was gone because hackers had burrowed into Mt. Gox’s servers and drained them of over 740,000 bitcoin—a sum worth over half a billion dollars at the time. The crisis reached a crescendo as a customer named Kolin Burges turned up on the streets of Tokyo for two weeks, holding a sign that read “Mt. Gox, Where Is Our Money?” As panic mounted and prices plunged, Karpelès dithered. Roger Ver, the libertarian known as Bitcoin Jesus, flew in on a Friday offering to help Karpelès salvage the mess, but, to his dismay, Karpelès proposed chilling out for the weekend and sorting out the mess on Monday. Barry Silbert, the early Coinbase investor, at one point received a call asking if he would like to buy Mt. Gox. He declined.
“I saw they were insolvent. I called the FBI,” recalls Silbert.
In another Hail Mary move, those working with Karpelès frantically passed around a memo describing the disaster that had befallen bitcoin and how it could be mitigated. But on February 24, a prominent bitcoin entrepreneur named Ben Davenport leaked the document to a former banker named Ryan Selkis, who had become an influential crypto blogger under the name Two Bit Idiot. Selkis published it and confirmed to the world Mt. Gox was toast and that many devoted bitcoin holders had been wiped out. The boom was over.
In San Francisco, the Coinbase crew watched the disaster unfold and collectively exhaled in relief, knowing they had made a smart bet to avoid getting wrecked. Like many other bitcoin businesses, Coinbase had relied on Mt. Gox as a source of bitcoin liquidity for day-to-day transactions during most of its first year. The company would run calculations to predict how many bitcoin it would need to satisfy customer demand over a given period of time, obtain the bitcoin from Mt. Gox and, thanks to Fred’s Goldman Sachs–born trading genius, even set up hedges to profit on price swings on the pool of bitcoin. The system worked for most of 2013 until, in Olaf’s words, “Mt. Gox started getting weird.”
Charlie Lee also recalls a series of warning signs that suggested the giant exchange run by the Frenchman and his cat was heading for a Chernobyl-scale meltdown. “Mt. Gox credited $1 million to the Coinbase account that didn’t belong to us. It was money created out of thin air because Mt. Gox couldn’t read the bitcoin blockchain,” he says. “Fred saw something was amiss and got Coinbase out in time.”
Not everyone was so fortunate. Just as a big bank’s collapse inflicts collateral misery far and wide, the Mt. Gox debacle wiped out companies that relied on the exchange for liquidity, as well as thousands of individual investors. Meanwhile, the price of bitcoin tanked. By early February, it had become clear that the giddy heights of $1,100 in December had been a bubble. The bubble had popped. The collapse of Mt. Gox knocked the price down to near $500, and this was just the beginning of a long, painful slump. It would be years before a bitcoin sold for $1,000 again.
As prices tumbled, so did bitcoin’s reputation. The digital currency had enjoyed a brief brush with respectability thanks to the 2013 Senate hearing and the work of the Bitcoin Foundation, which had tried to carry on like an ordinary trade group. But by 2014, the foundation was in disgrace and in disarray. Karpelès resigned as a director in the wake of the Mt. Gox catastrophe, while the blogger Selkis (aka Two Bit Idiot)—who had blown the whistle on the whole thing—demanded that the men serving as the foundation’s president and executive chairman quit, too. Selkis blasted the pair for failing to warn the broader bitcoin world about Mt. Gox’s impending collapse and accused them of colluding with Karpelès to protect their personal stashes. Meanwhile, another face of the foundation had troubles of his own. Charlie Shrem, the gadfly CEO of Coinbase rival BitInstant, had blown off the advice of the Winklevoss twins to cut out the cocktails and club life and focus on running his bitcoin business. A big part of running such a business was staying on the right side of regulators, but Shrem had ignored this until, returning from a trip to JFK airport, DEA agents greeted him with criminal charges, including money laundering. Shrem would plead guilty to lesser charges and serve over a year in federal prison—just one of a growing number of felons tied to bitcoin.
In May, the Foundation appointed others to beef up its depleted ranks, including a former child star of Disney’s Mighty Ducks movies named Brock Pierce. The appointment set off a wave of resignations from other members who were aghast at Pierce’s troubled past, which included a lawsuit brought by former employees who alleged that he had used drugs to coerce them into sex when they were minors.
Founded as a bitcoin version of a chamber of commerce, by 2014 the foundation looked much more like a fly-by-night gaggle of crooks and con men. Whatever goodwill the group had built up had been squandered several times over.
Worse, the antics of the bumbling Bitcoin Foundation paled next to what serious criminals were doing with the currency. In late 2013, the media reported the arrest of the Dread Pirate Roberts—the mastermind behind the global drug bazaar known as the Silk Road. In a fit-for-Hollywood moment, disguised FBI agents tackled the Dread Pirate—aka Ross Ulbricht—in a San Francisco library and, critically, snatched away his laptop before he could close the cover and encrypt all the data it contained. The laptop provided oodles of information about Ulbricht’s sprawling criminal empire, including the keys to his vast stashes of bitcoin—the currency that had made the Silk Road possible in the first place.
It also led to two more high-profile pelts for star prosecutor Katie Haun. Since the time her boss had asked her to open the FNU LNU file to prosecute bitcoin, Haun had become an expert in digital currency. Not only had she learned the ins and outs of private keys and encryption, she had begun teaching investigators at other agencies, including the IRS and the DEA, about how cryptocurrency worked. Meanwhile, it turned out that two federal agents not only knew about bitcoin, but had been treating it as a way to line their own pockets during the investigation to bring down Silk Road. One of them, Secret Service Special Agent Shaun Bridges, had robbed Silk Road accounts to the tune of at least 1,500 bitcoin—worth over $800,000 at the time—that belonged to the US government. And the DEA’s Carl Mark Force IV did something much worse. Force not only stole from Silk Road accounts but sold fake law enforcement tips to the Dread Pirate Roberts while also blackmailing him. And, in a surreal low point, he staged the murder of an informant—charging the Dread Pirate bitcoin for the fake hit, and even sending him gory photographs meant to show the informant’s painful death. The corrupt cops made sloppy mistakes, however, such as communicating with the Dread Pirate on their work computers and, in Bridge’s case, telling people—including prosecutor Katie Haun—that he was the point person on all things bitcoin for the US government. Haun made easy work of this mess and would eventually help send Bridges and Force to prison—triggering another round of headlines about bitcoin and crime. The dirty agents would not be Haun’s last bitcoin-related prosecution. Soon afterward, she would lead an investigation to take down BTC-e, an infamous bitcoin exchange run by a shadowy Russian that served as a money-laundering service for criminals around the world.
The news around bitcoin after the 2013 bubble collapsed was often grim, but there were comic moments too. The most notable one came in March 2014 when Newsweek magazine, which had briefly gone out of business, returned to the newsstands with a bitcoin scoop to end all scoops: it had found the identity of Satoshi. In a splashy cover story, the magazine revealed that bitcoin’s creator had been hiding in plain sight outside of Los Angeles, and that he was a sixty-four-year-old Japanese-American man named Dorian Satoshi Nakamoto, who lived with his mother. The story led to a swarm of reporters chasing Dorian Nakamoto across the freeways of LA. The ensuing restaurant sit-down with Nakamoto revealed the purported crypto creator did not know the first thing about cryptocurrency. The next day, a long-dormant message board account tied to the real Satoshi sent out a simple message: “I am not Dorian Nakamoto.”
Newsweek’s credibility lay in tatters as everyone, except the magazine itself, agreed the big bitcoin reveal was a bust. Meanwhile, a group of longtime bitcoin boosters took pity on the hapless Dorian Nakamoto and raised a collection of 67 bitcoin to smooth over his ordeal. Years later, the older man would cash out the donations for hundreds of thousands of dollars, becoming a bitcoin enthusiast himself—turning up as an amiable curiosity at random crypto conferences. And like so much else tied to bitcoin, his puzzled face has become a meme that appears regularly on Twitter and on cryptocurrency message boards.
Nakamoto’s adventure brought a comic respite but, by mid-2014, the outlook for bitcoin was bleak. It wasn’t just the reputational blows that came with the presence of the Silk Road and its ongoing association with criminality. The bigger problem was that the original promise of bitcoin as a revolutionary new payment method was falling badly short.
While Coinbase and others had madey it easier to acquire bitcoin, it was still a headache to spend it in the real world. Even as more merchants accepted the currency, it became obvious to many that it was just a gimmick. Satoshi’s invention, it turned out, was a lousy way to pay for things, in part because it could take ten minutes or more to confirm a transaction had cleared. Worse, the price of bitcoin bounced around so much that a consumer’s purchasing power might decline by 20 percent in the space of an afternoon. And even as diehards like Olaf endeavored to live on it, ordinary consumers enjoyed an ever-easier number of ways to pay for things—from the quick swipe or tap of a credit card to a nifty new peer-to-peer app called Venmo. Why would someone pay with this slow, sketchy thing called bitcoin?
And any hope people had of bitcoin as an inclusive, democratic form of money was undercut by studies of those using it. Media reports revealed that men accounted for 96 percent of the currency’s users—a ratio that was bro-heavy even by Silicon Valley standards. It didn’t help that some crypto events featured scantily clad women, representing the worst of the tech industry’s “booth babe” culture.
And the price kept dropping. After a brief rally in the early summer, by the fall of 2014, bitcoin fell to $400—and kept falling. By 2015, the price was barely above $200—more than 80 percent off its highs of late 2013.
For many bitcoin believers, including some at Coinbase, which now counted nearly fifty employees, the mood was glum.
But not everyone felt this way. On New Year’s Eve of 2014, ten months after the Mt. Gox collapse, Olaf stood outside a party in San Francisco buying bitcoin on his phone. Ecstatic, he told his friends, “Can you believe how cheap it is? It’s never going to be this price again.”