April 11, 2013
The day after Mt. Gox shut down under the strain of heavy trading, the members of the corporate board of Lemon, Wences Casares’s digital wallet, showed up at the company’s Palo Alto offices for a lunchtime meeting. The price of Bitcoin sat more than 50 percent lower than where it had been twenty-four hours earlier. But the sudden downturn had done nothing to dim Wences’s faith in Bitcoin’s future. Instead, it had increased his conviction that the companies dominating the Bitcoin universe, like Mt. Gox, needed to be replaced, and that he needed to do more than just be a cheerleader for Bitcoin among the Silicon Valley elite.
Lemon provided a way for customers to keep all their credit cards and coupons in digital form on their smartphones. Wences proposed to his board that they add a pocket for Bitcoins that would be a safe, reliable way to keep virtual currencies and potentially even to buy them. To get started, Wences suggested that Lemon could use $1 million of its remaining money to buy Bitcoins that could serve as an initial pool for customer purchases. This was actually a great time to buy coins, Wences argued, because the price was down after the latest price crash.
Wences expected to see his board members light up—particularly Micky Malka, the chairman of Lemon’s board and one of the first people Wences had gotten excited about Bitcoin back in 2012. Instead, Micky furrowed his brow. Is this really what Lemon set out to do? Micky asked Wences. Lemon had finally started catching on as a digital wallet. Wouldn’t opening it up to virtual currencies engender all sorts of unknown legal risks?
The other board members quietly listened to Wences’s explanation of why this was worth doing. They all knew it was dangerous in Silicon Valley to alienate an entrepreneur like Wences—there was no easier way to ensure that a company failed. But they didn’t jump to his defense either.
After the meeting was adjourned, the board member who had looked the least skeptical, Eric O’Brien, pulled Wences aside and asked him: “How strongly do you believe in this—what are you personally doing?”
Wences didn’t mince words: “I am personally allocating a percentage of my net worth to this that is borderline irresponsible because I believe in it so much.”
Regardless of what the Lemon board wanted to do, Wences said, “I would advise you to invest as much money as you can stomach losing.”
He told O’Brien to buy coins at Mt. Gox, but to move the coins off Mt. Gox as soon as the order went through.
“It is either going to be worth zero or worth five thousand times what it is today.”
IN THE DAYS that followed, Mt. Gox reopened for business and the price stabilized around $100. But many believed that the recent price crash proved the flaws in the whole concept. Felix Salmon, a financial columnist at Reuters, wrote a widely circulated article pointing out that the volatile price of Bitcoin made it nearly impossible to use for its most basic purpose, as currency. If consumers didn’t know whether a Bitcoin would be worth $10 or $100 tomorrow they would be unlikely to spend their coins and merchants would similarly be unlikely to accept them. Even this critic, though, saw something elegant in the network underlying Bitcoin.
“For the time being, Bitcoin is in many ways the best and cleanest payments mechanism the world has ever seen,” Salmon wrote. “So if we’re ever going to create something better, we’re going to have to learn from what Bitcoin does right—as well as what it does wrong.”
The day after the crash, the Winklevoss twins finally went public in the New York Times with their now significant stake in Bitcoin—worth some $10 million. The interest was not restricted to the United States. A few weeks after the crash, a national television station in China broadcast a half-hour segment on the new enthusiasts in that country, and several local entrepreneurs began setting up exchanges to buy Bitcoins using yuan.
Despite the crash, everyone with a Bitcoin idea found that there was now no shortage of eager investors in Silicon Valley. In May, Pete Thiel’s Founders Fund announced that it was putting $2 million into BitPay, the payment processing company that allowed merchants to accept Bitcoin and end up with dollars in their bank—taking advantage of the Bitcoin network’s quick and cheap transactions.
But the company that was attracting the most attention was Coinbase, founded by the veterans of Airbnb and Goldman Sachs. The twentysomething cofounders had clean-cut looks and soft-spoken ways that naturally engendered confidence. Investors liked that the pair avoided the ideological talk of overthrowing the Fed and instead sold their company as a safe and easy place for consumers to buy and hold coins that wouldn’t be subject to endless delays and scrutiny from the authorities. They also had real professional experience at well-known companies, something that had been in short supply in the Bitcoin world up to this point.
After consultations with Wences, Micky decided to team up with the New York venture capitalist Fred Wilson to put $5 million into Coinbase. It was the largest publicized investment in a Bitcoin company to date, by a wide margin, and the first time an established venture capitalist like Wilson had put serious money into the space. The rest of Silicon Valley took notice.
CHARLIE, MEANTIME, WAS taking advantage of BitInstant’s status as the only serious Bitcoin company in New York—the media capital of the world—to become a sort of public spokesman for Bitcoin in the press. He regularly invited reporters to a bar that he had invested in at the beginning of the year, EVR, the sort of dark, swanky Manhattan club that made its clientele line up in high heels on the sidewalk. The round leather booth in the back corner was Charlie’s standing nighttime office, with some top-shelf liquor on the table for guests.
Those who knew Charlie back in Brooklyn were amazed at his transformation from a short, awkward teenager into a confident impresario who bragged about the ring that he wore, engraved with the private key to one of his Bitcoin wallets. But as always with Charlie, it was all somewhat less than it appeared. He still lived in his teenage bedroom in the basement of his parents’ house in Brooklyn. He left people with the impression that EVR was his bar, despite the fact that he had put in only about $15,000 and owned less than 1 percent of it. Meanwhile, Charlie’s company was racing furiously to keep up with all the new competitors, especially Coinbase, and Charlie was often missing when he was needed most, hanging out at the bar or talking with reporters. At one point, Cameron Winklevoss asked Charlie: “Do you want to be the proprietor of a bar or the CEO of a Bitcoin company? You can’t have it both ways.”
Cameron, the more involved of the two twins, constantly pressed Charlie on why things weren’t getting done faster. When Coinbase’s $5 million investment was announced, Cameron warned Charlie that Coinbase could steal BitInstant’s thunder.
“Just deliver the deliverables and stop fucking around,” Cameron told him.
Charlie meekly submitted. “OK, I will push the team and myself harder.”
IN TOKYO, MARK Karpeles was also learning that Mt. Gox’s first-mover advantage was not impregnable.
On May 2, Mark was sued in a Seattle court by CoinLab, the company run by Peter Vessenes that had been scheduled to assume responsibility for Mt. Gox’s business in the United States earlier in the year. CoinLab accused Mt. Gox of breaching its contract by not handing over the customers. Troubles deepened a week later when the money in Mt. Gox’s two American bank accounts—some $5 million—was seized by federal agents, who accused Mt. Gox of violating federal money-transmitting laws. It wasn’t apparent at the time, but these moves were part of the net tightening around Silk Road, as law enforcement agents in Baltimore narrowed in on their prey. Prosecutors had secretly filed a sealed indictment on May 1 against Dread Pirate Roberts for narcotics trafficking and were prepared to arrest the mastermind as soon as they figured out who he was.
Given all this turbulence, it was remarkable that anyone continued using Mt. Gox at all. In the world of trading, though, the most valuable thing an exchange can offer is liquidity or, more simply, people buying and selling. An exchange with the best technology in the world isn’t worth anything if no customers are there offering to buy and sell. Mt. Gox still had liquidity because it had attracted so many customers from its days as just about the only exchange around, and some customers would move only if others did as well.
But a chasm was opening up between the early Bitcoiners and the new, more practical community of entrepreneurs, engineers, and investors. When some of the developers working on the underlying Bitcoin code set up a Bitcoin press center, it immediately led to fights about who was presentable enough to be listed as a contact for journalists, especially when Roger Ver was taken off the list. Erik Voorhees lashed out at those trying to smooth Bitcoin’s sharper edges.
“It is embarrassing to see Bitcoin reduced to sniveling permission-seekers, too cowardly to speak about the real issues and the real reasons why this technology is so important,” Erik wrote. “Bitcoin is a movement, and those trying to distill it into nothing more than a cute new technology are kidding themselves and doing a terrible disservice to this community.”
EVERYONE SEEMED READY for a truce from the bickering as the Bitcoin Foundation’s first-ever conference approached in late May. The foundation had booked the main convention center in the capital of Silicon Valley, San Jose.
On the morning of the conference’s first day, Friday, May 17, the Valley news site TechCrunch went live with a story that officially announced the investment the Winklevoss twins had made in BitInstant, which had remained a secret even after they went public with their holdings of Bitcoin. The investment was put at $1.5 million. Even this article was the cause for a small tiff with Charlie, who had accidentally tipped off another reporter first.
“Your communication is piss poor and gums up the entire operation,” Tyler Winklevoss wrote.
But the tension quickly passed and Charlie and the twins showed up at the convention center to find that they were heroes of sorts to the assembling Bitcoin masses. Many of the conference attendees had been aficionados for years, waiting for the world to see the beauty of their pet project. Now these tall, statuesque celebrity twins were standing up for their cause. On Friday night, the twins delivered the keynote speech together, clad in sneakers and button-down shirts with rolled-up sleeves. They opened with a quote from Gandhi, and proceeded to cite Dr. Seuss and the Bitcoin pizzas purchased by Laszlo Hanecz. The next morning, when the general exhibition opened, one vendor was selling shirts with the smiling face of Charlie Shrem, in the style of Barack Obama’s famous “Hope” poster.
The adulation distracted Charlie from the business opportunities at the conference. He got around to scribbling down some thoughts for his Saturday afternoon speech only an hour beforehand, while standing around the booth. The talk was unsurprisingly disjointed, but Charlie still possessed his old infectious enthusiasm, which had the crowd cheering and clapping. That night, the whole BitInstant team went out for a boozy dinner with shots of Fireball whiskey, followed by a night out at a club.
While Charlie and other Bitcoin old-timers were reveling, a more quiet and sophisticated conversation was going on around the edges. In a back room of the convention center, Gavin Andresen gathered with the four other developers who were maintaining the basic Bitcoin software that computers on the network were running. This was the first time the so-called core developers had met in person, and far from the crowds they talked about the serious work of keeping the basic Bitcoin protocol safe from hackers and forks.
The moneyed set that had recently converted to Bitcoin was also buzzing around the conference. Wences didn’t speak at the conference but he had lots of private conversations with the investors and entrepreneurs whom he had introduced to the technology, including PayPal’s David Marcus, who had turned his name badge around so that no one would know who he was. After browsing in the exhibition hall, Marcus told Wences that he had been appalled by the naïveté and lack of sophistication of the existing companies. When asked how they were dealing with anti–money laundering laws, none of the young entrepreneurs gave a knowledgeable answer. It was so bad that Marcus told Wences he was contemplating quitting PayPal and starting his own Bitcoin exchange—something he later decided against.
For these Silicon Valley power brokers, there was an absurdity to the old-school Bitcoiners who crowed to each other about being the leaders of a new global movement and getting rich in the process. The convention center happened to be hosting the Big Wow! ComicFest at the same time as the Bitcoin conference, and it was sometimes hard to tell who among the long-haired nerds were there for the comics and who for the virtual currency.