Virtual Billions: The Genius, the Drug Lord, and the Ivy League Twins behind the Rise of Bitcoin

273 Pages·2016·2.79 MB·English

by  Eric Geissinger

Published 2016 by Prometheus Books Virtual Billions: The Genius, the Drug Lord, and the Ivy League
Twins behind the Rise of Bitcoin. Copyright © 2016 by Eric Geissinger. All rights reserved. No part of this
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Cover design by Nicole Sommer-Lecht
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The Library of Congress has cataloged the printed edition as follows: Names: Geissinger, Eric, 1968-
Title: Virtual billions : the genius, the drug lord, and the ivy league twins behind the rise of bitcoin / Eric
Geissinger.
Description: Amherst, NY : Prometheus Books, 2016. | Includes index.
Identifiers: LCCN 2016007396 (print) | LCCN 2016012216 (ebook) | ISBN 9781633881440 (hardback) |
ISBN 9781633881457 (eBook)
Subjects: LCSH: Electronic funds transfers. | Bitcoin. | Electronic commerce--History. | BISAC:
BIOGRAPHY & AUTOBIOGRAPHY / Business. | BUSINESS & ECONOMICS E-Commerce General
(see also COMPUTERS Electronic Commerce). | BUSINESS & ECONOMICS Money & Monetary Policy.
Classification: LCC HG1710 .G45 2016 (print) | LCC HG1710 (ebook) | DDC 332.1/78--dc23
LC record available at http://lccn.loc.gov/2016007396
Printed in the United States of America

I made a mistake in presuming that the self-interests of organizations,
specifically banks and others, were such as that they were best capable of
protecting their own shareholders and their equity in the firms.
—Alan Greenspan, October 24, 2008, to Congress It's a bubble. It has to have
intrinsic value. You have to really stretch your imagination to infer what the
intrinsic value of Bitcoin is. I haven't been able to do it. Maybe somebody else
can.
—Alan Greenspan, December 4, 2013, in an interview with Bloomberg
Introduction: Spending Symbols and Buying Potatoes
Chapter 1: Satoshi Nakamoto: What He Invented
Chapter 2: Satoshi Nakamoto: How Bitcoin Works
Chapter 3: Satoshi Nakamoto: A Rocket-Powered Launch
Chapter 4: Ross Ulbricht: Into the Dark
Chapter 5: Ross Ulbricht: The Rise and Fall of Silk Road
Chapter 6: The Winklevoss Twins: Born on Third Base, Hit a Double
Chapter 7: The Winklevoss Twins: The Fog of Success
Conclusion: Incremental Progress
Acknowledgments
Notes
Index
Note: According to general but not yet unanimous online agreement,
Bitcoin (singular, capital B) is the name of the currency, the network
supporting the currency, and the payment system in general. A single
bitcoin or collection of bitcoins (referring to units of the currency) uses
the lower case. For example, “I sure love Bitcoin, and I bought ten
bitcoins yesterday.”
On January 1, 2010, all the bitcoins in the world could be had for less than a
cent. By July 1, 2013, they were worth nine billion dollars. Growth at this rate is
historically unprecedented: Bitcoin easily outpaced Facebook, Twitter,
Microsoft, and every other technology company in its rush to a multibillion-
dollar capitalization. Back in 1997, the New York Times called a similar
technology boom the “Internet Gold Rush,”1 as companies monetized
information, sold online advertising, and made their storefronts virtual. It was
slow going at first: “Digital miners are meeting with spotty success,”2 the paper
reported, with most of the big money made by companies selling internet access
and hardware (primarily routers and cables). This soon changed. Once the
internet's backbone had been built, a bonanza followed, and companies achieved
Fortune 500 valuations in a three-year period of explosive, unrealistic growth.
What became known as the dot.bomb bubble popped in 2001, and the Internet
Gold Rush ended; sober businessmen moved in.
Bitcoin isn't the electronic equivalent of a dollar, transformed into bits and
bytes and transmitted over the internet; it's more of a financial subsystem, an
alternate payment stream, which soon ushered in a new wave of investment—a
silver rush. It's hard to understand the extent of Bitcoin's growth without turning
to the only comparable real-world parallel, the transformation of a bland series
of rolling hills next to a modest mountain in Nevada—the uninhabited land3
worth pennies a few years before—into a blasted landscape pockmarked with
burrows and smoke, unsteady cabins and open latrines, with desperate miners
striking claims and digging and fighting over square feet of turf that gleamed
with the possibility of buried riches. The 1859 discovery of the Comstock lode
set off a frenzy of activity: it represented one of the largest silver discoveries in
the history of mankind and signaled the end of the more famous, but played-out,
California Gold Rush (1849–1855).
Soon so much silver was being pulled out the Comstock mines that prices
dropped worldwide and governments considered demonetizing silver currency,
as it no longer had significant independent value. The Comstock Lode's social
and political effects were far reaching: acting as a magnet, it deformed
settlement patterns across the West, spurred Nevada into an abrupt and early
statehood, drew fortune-seekers from around the globe, and caused booms in
cities as distant as San Francisco and Los Angeles. Miners swarmed the
landscape, cleared forests, constructed bridges, and tunneled through mountains.
The lode rewarded industry and meted out heartbreak in unequal measure.4
James Finney,5 one of the original discoverers of the so-called “Gold Hill”
strike, was an unsophisticated man who sold his share in the claim (worth tens of
millions) for an old horse and a bottle of rot-gut whiskey. This sounds
uncomfortably close to a folk legend, but it's certainly true none of the early
miners on the scene, who should have profited most with the least work, did well
for themselves—stories of heavy drinking, insanity, and suicide were common.
Compared to the fate of many others, Finney's fate was a relatively light
sentence for stumbling across one of the great buried fortunes in the history of
the world.
The Comstock Lode was a global event. Most people didn't feel the effect of
the mining strike directly, beyond a diluted bump in national prosperity, but for
some it meant uprooting themselves and changing everything they had ever done
and leaving behind everyone they had ever known. Mining had a reality you
could sink your hands into, in fact it was required: separating silver from lumps
of quartz or shovelfuls of sticky blue mud was a messy job. When it was over,
and the lode was played out, something tangible had been produced, and refined,
and was in use throughout the world: 192 million ounces of 99.7 percent pure
silver. You could point to it and say, Look, that's what the fuss was all about.
Something beautiful and real had been created from one of the ugliest and most
sordid celebrations of greed the human race had ever enthusiastically indulged.
Yet at its height, Bitcoin's net worth surpassed, in adjusted dollars, the
aggregate total of Nevada's Comstock Lode over any five-year period.
Bitcoin wouldn't have captured the fancy of so many tech-savvy early
adopters if it had been built on an unstable or poorly designed code base, or
thrived despite wary journalists telling readers as early as 2011 that Bitcoin was
nothing more or less than a “bubble,” liable to pop at any moment.6 Bitcoin
succeeded without a single well-known entrepreneur adopting it within the first
two years of its existence. Bitcoin flourished despite lack of institutional support
of any kind, its value unstable, though trending ever-upward.
Bitcoin's relentless advance, despite a complete lack of traditional financial
backing, was either a fantastic coincidence or the rational consequence of the
law of supply and demand (combined with perfect timing). Looking back on it,
Bitcoin's rapid expansion occurred in a void, without resistant pressure. A need
existed, an opportunity as yet untapped and largely unforeseen, and when
Bitcoin was invented and distributed it filled the empty space effortlessly,
making little noise as there was little opposition. No businesses were impacted
and pushed out of the way, and nobody gave the strange startup currency much
attention at all—until it was too late to stop its onrushing growth.
By 2014, dire tales of an impending Bitcoin collapse, still regularly
published, began to fade into the background. Businesses all over the world were
signing up to accept the currency. Conservative investors started pouring money
into Bitcoin startups. In January 2014, the Sacramento Kings of the National
Basketball Association became the first professional team to accept Bitcoin for
ticket and merchandise sales.7 Bitcoin had attained a tenuous though stable level
of respect in the financial community, and when it's possible to buy groceries in
Birmingham, Alabama, using bitcoins, without anyone batting an eye8…it's safe
to say Bitcoin's moving quickly toward mainstream acceptance.
When confronted by something as miraculous and weird as Bitcoin's
explosive five-year growth, it's hard to avoid the fundamental question: How on
earth did this happen?
When I'm at a dinner party, surrounded by people desperate to know more about
Bitcoin—which, now that I think about it, doesn't occur as often as it should—
there's always somebody who interrupts my description of the currency and
pooh-poohs the entire Bitcoin concept because, quite obviously, “Bitcoins aren't
real.” They're nothing more than electrical impulses flying around the internet,
sensitive to magnetic fields and stymied by broken wires or overheated hard
drives or misrouted signals. It's crazy to base a currency on a delicate computer
network, which might suffer a catastrophic collapse at any moment. Surely