On The Horizon: A Virtual Economy?

Early in 2009, during the first months of the Great Recession, a mystery man named Satoshi Nakamoto introduced a new kind of money—the digital currency known as Bitcoin. There were no physical coins to jingle in your pocket or bills to slip to a maitre d’. Bitcoin was all computer code. Depending on whom you asked, the new currency was variously a clever scam, a fleeting enthrallment on the order of seventeenth-century tulip mania, or a stroke of genius that would, after surviving its baptismal fires, change the course of human history.


“Satoshi Nakamoto” turned out to be a pseudonym. For the past five years journalists, technology geeks and assorted hackers have been trying to unmask him—or them, as the case might well be—without success. Most available clues point to a person living in Britain or of British decent. But in March of 2014, Newsweek magazine claimed to have found Nakamoto living modestly in Temple City, California, under his real name (though he’d traded “Satoshi” for “Dorian”). Nobody but Newsweek believed the story. Even the “real” Satsohi Nakamoto—who had dropped out of sight in 2011—emerged from hiding to post this simple denial: “I am not Dorian Nakamoto.” And then he was gone again.

Meanwhile, excellent minds from all quarters weighed in on Bitcoin’s prospects. Warren Buffett called the new currency “a mirage” and “a joke.” Jamie Dimon, JPMorgan Chase chief executive, said Bitcoin was “a terrible store of value.” Treasury Secretary Jack Lew worried that Bitcoin was best suited to black-market traders, who could, for example, buy weapons anonymously at the touch of a smartphone. Nobel Prize-winning economist Paul Krugman wrote a New York Times blog post titled “Bitcoin is Evil.” (But it was Krugman who once predicted that the Internet’s impact on the economy would be “no greater than the fax machine’s.”) Another Nobel economist, Robert Shiller, judged the rising Bitcoin enthusiasm to be a mere bubble, destined to burst.

On the other side of the chasm were youngish tech turks who claimed the establishment fogies wouldn’t know a world-beating technology if it bit them on the backside. Chief among them was Marc Andreessen, the Netscape founder and billionaire venture capitalist. Andreessen reduced Buffett and his ilk to “old white men … crapping on tech they don’t understand.” Jared Cohen, the Weston native who heads Google’s think tank, said, “It’s very obvious to all of us that cryptocurrencies are here to stay.” (“Cryptocurrency” alludes to the specialized coding that allows e-money to flow securely.) Most recently, the Winklevoss twins, Greenwich natives who gained fame first as social networking innovators (they developed the precursor to Facebook) and then as Bitcoin speculators, claimed the value of a single bitcoin will imminently rise from $506, as this is being written, to about $10,000. And the hipper hedge fund managers have now created Bitcoin funds—a powerful signal that the digital currency had gone mainstream.


Joining the Revolution

In Greenwich, the prime Bitcoin believer is a thirty-eight-year-old entrepreneur named Ian Treibick. We found him—tall, blond, amiably bearish—out in the backcountry, working in a one-room studio on a large property. Inside the studio were two oversize Apple computer monitors and a metal rack full of little black boxes. The boxes whirred loudly and generated an extraordinary amount of heat—so much heat that when the air conditioner cut out recently, the room temperature surged to nearly 120 degrees. This specialized hardware comprises Treibick’s Bitcoin “mine”—where, in effect, he mints money. We’ll come back to that shortly.

Treibick was not an immediate Bitcoin convert. “Frankly, when I first saw it, I thought, ‘Is this really going to work?’” But he was intrigued enough to buy a quarter of a bitcoin for about $137. He did it on a dare. Last January, his father, the late telecom magnate Richard Treibick, greeted Ian’s brand-new Bitcoin interest with a fatherly wet blanket. “He didn’t think it would ever fly,” Treibick recalls. “He said, ‘Can you even buy anything with it?’” Thus challenged, Ian purchased his sliver of e-currency from a Bitcoin exchange and used a portion of it to order a regular old fan from Overstock.com, which had just become the first major online retailer to accept bitcoin. The fan arrived a few days later.

That you can make real-world transactions in bitcoin with an ever-growing list of merchants barely hints at the currency’s revolutionary potential. “It’s kind of like the adoption of the Internet,” Treibick says. “Nobody in the eighties would ever believe that we have this amazing thing where we can get movies and music, where we can do banking and buy products, where we can connect with people and stay in touch. If you had told somebody that, they would have said, ‘Nah, it’s for universities and government. It’s not going to have that kind of adoption.’”

The rise of Bitcoin, like that of personal computers and the Internet before it, constitutes a genuine “Black Swan” historical moment, Treibick believes, citing Nassim Nicholas Taleb’s theory of rare, massive, unpredictable cultural earthquakes that people say in hindsight were entirely predictable. “If the adoption of Bitcoin continues, I’d say it’s going to be much bigger than the Internet,” Treibick says with a raised brow. “Why? Because it’s going to change the global economy.”

That sounds a little scary. What it means, essentially, is that Bitcoin will be the Internet of money—we’ll send and receive it much as we send and receive texts and emails, only a lot more securely. (Bitcoin’s core program dazzles the world’s techno-elite with its cryptographic loveliness. While hackers have invaded NASA, the U.S. military, the New York Times, Citibank and JPMorgan Chase among many others, they have not touched the Bitcoin core. “I came up with beautiful bugs,” one expert security hacker, Dan Kaminsky, told The New Yorker. “But every time I went after the code there was a line that addressed the problem.”)

Though Nakamoto proposed Bitcoin simply as a medium of exchange, he understood that the implications of his creation were much broader.


Currency With Major Consequence?

Nakamoto was motivated partly by frustration with the sort of Big Bank tomfoolery that helped bring on the Great Recession and the sort of profligate government spending that harms currencies and weakens individual bank accounts. Nakamoto wrote in 2009:

“The central bank must be trusted not to debase the currency, but the history of fiat [government-issued] currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Through Bitcoin, Nakamoto proposed to shift the balance of power away from governments and corporations and toward individuals. Slowly, gradually, this appears to be happening. As Treibick observes, for the first time in modern history, people can conduct their financial lives largely outside the dominion of governments and banks. (Thus Bitcoin’s powerful appeal to libertarians.) Should Bitcoin keep growing, serial revolutions could follow. Among the largest would be “the bringing of banking to the unbanked,” Treibick says, noting that millions upon millions of people lack access to the banking and credit card systems we take for granted. Banking for the unbanked is not technologically viable—yet—since only a third of the world’s population uses the Internet. But as smartphones and cell phones proliferate in developing countries, the notion of Bitcoin as a “bottom-up” phenomenon, perhaps led by Africa, India and Brazil, seems less and less remote. Treibick reports that much venture capital is at present being sunk into building precisely this sort of expansion.

A second revolutionary potential is that Bitcoin could hedge against troubled fiat currencies. “Did you see what happened in Cyprus recently?” Treibick asks. “The government basically went in and emptied everyone’s bank account.” That is, to prop up its collapsed economy in 2013, Cyprus “legally” raided its citizens’ accounts; many lost their life savings. Bitcoin, held in one’s own encrypted “digital wallet,” is beyond the reach of such economic tyranny. (Bitcoin wallets are stored on your computer or smartphone, on paper, or with a third-party account manager.) There are less extreme examples than Cyprus. In any country where the currency suffers debasement—Venezuela is a good example—one has a much better chance of retaining his wealth by converting it to bitcoin. (Some will disagree: Bitcoin itself is volatile, but since all indications are that it’s expanding rapidly, the long-range prognosis seems favorable.) In countries where the currency is not troubled but government policy makes international transactions difficult, such as China, Bitcoin is already proving its worth.

Above all, Bitcoin stands to be a huge disruptor of certain traditional businesses. Western Union seems an especially ripe target; it won’t be able to compete with Bitcoin’s miniscule transaction fees. PayPal, too, had seemed a dinosaur in waiting, but in September the online payment service, whose parent company is eBay, cautiously dipped its toe into Bitcoin’s rising sea by allowing North American merchants to accept bitcoin for digital goods. The PayPal news represents a big step toward mass adoption, according to Treibick. But his favorite adoption story comes from MIT: This fall, powers within the institute arranged to give all undergraduates $100 worth of bitcoin, and prepared local merchants to accept it.

It’s in the realm of credit cards (and therefore banking) that Bitcoin could prove most disruptive, even if nobody’s predicting Bitcoin will replace banks and their myriad services. (Not least of these services is security. If a bank is robbed or your credit card is stolen, you still have your money. If you leave your Bitcoin wallet “open” with poor password protection, your bitcoin might soon be gone; gone, too, if your computer self-destructs and you haven’t backed up your wallet offline. This is why some prefer the third-party option.) Credit cards, introduced in the 1950s, piggybacked on the Internet commerce boom because there was no other viable payment system in place if you wanted to order books or shoes. Now there is.  Payment by bitcoin, since it’s like sending a text, is as fast as by credit card, with no or minimal fees. (Treibick says the standard minimum fee is about four cents, regardless of what an item costs. According to the informational site Bitcoin.org, “Transaction fees are used as a protection against sending transactions to overload the network. The precise manner in which fees work is still being developed and will change over time.”)

Using bitcoin, you’ll never have your account frozen or penalized, and you’ll never worry about the increasingly nightmarish prospect of credit card fraud and identity theft. Further, the Bitcoin system cannot be shut down or commandeered, because it’s decentralized. Transactions are accomplished peer-to-peer rather than through a middleman. To put it another way, there is no Bitcoin “center,” since it’s a protocol, like the Internet, rather than an entity, like Visa or a national bank. In this sense, Bitcoin represents the opposite of Brave New World, which posits a central authority. “You and I can make a bitcoin transaction—I can send you five cents or ten million dollars with very low fees, no oversight, no regulations, no bank fees, and no wire transfer fees,” Treibick says. “I can send it to you instantly, anywhere in the world.” (Credit cards still have one advantage, albeit a dangerous one: They allow you to spend money you don’t have. Credit and debit cards also remain a convenient means for buying bitcoin. Treibick, though, favors buying them through a linked bank account, and adds that certain Bitcoin exchange sites, such as localbitcoin.com, tell you where to go to pay cash for bitcoin.)

All of which leaves banks in an odd position, oscillating between outright hostility toward Bitcoin and trying to figure out how to leverage its power. Though plenty of Bitcoin naysayers remain, the consensus has moved toward the view of InvestmentNews’s Andrew Filipowski: “The Bitcoin protocol is the genie that has left the bottle, never to be contained again.”

What undreamt of things that genie will do is the question.

 

Making it in the Mines

After Treibick’s successful purchase of an electric fan, he investigated Bitcoin further, and decided he possessed the right background to set up a little business.

His background consisted largely of being in the right place at the right time. While still at Greenwich High School in the early nineties, Treibick happened into a job building websites for the Greenwich-based Electronic Newspapers, one of the first web development companies in the newly opened cyber frontier. “That was all on-the-job training, because there were no books yet to tell you how to do it,” Treibick says. Instead of going off to college, Treibick founded his own web development firm, CGI Solutions. It took off, having won major industrial clients like Honeywell and McDonell Douglas. CGI survived the burst of the dot-com bubble circa 2001, but soon after, Treibick sold the company’s main assets to Motorola. Opting for something lighter and airier, he founded WindPath Fractional Yachting, a timeshare boating business that he still owns and for which he built the software. The business allowed him lots of time away from the desk, the better to enjoy time with his wife, Kim, and their two young children. “And then I fell into Bitcoin.”

Treibick’s Bitcoin business, called Coin Cadence (coincadence.com), began earlier this year as a software project—a price index of various Bitcoin exchanges. (Bitcoin prices can vary between the ten or so major exchanges, because the market is still small, highly speculative and therefore less “rational,” making consensus on valuation harder to achieve.) Now Coin Cadence is also the hub of a prime Bitcoin mining pool—P2Pool—that Treibick operates.

What is a mining pool? There are three ways to acquire bitcoin: You can buy it from a Bitcoin exchange; you can accept it as payment for goods or services; or, most exotically, you can mine it. Mining is tricky to conceptualize. Imagine a computer game featuring a mountain (the bitcoin “blockchain”) studded with deposits of gold (blocks of bitcoin). Miners can mine individually if they want, but they’re much likelier to find deposits if they organize themselves into teams (pools). The more computing power a team has, the more deposits it finds. As a reward for a find, or “solving a block,” a person or pool is paid twenty-five bitcoins (a pool must then divide these bitcoins among its miners according to their computing contribution). This system of rewards for solving blocks is how new bitcoins come into circulation—how they are “minted.”

There exist bitcoin mines of exceptional power: Rows upon rows of those little black boxes—the dedicated mining hardware—heating up gargantuan warehouses around the clock. (Washington State is the most popular place in this country for these megamines, because the price of electric power is cheapest there.) “What the mining equipment is really doing is solving complex mathematical problems that have a known difficulty,” Treibick explains. “And the difficulty changes with the number of miners.” These mathematical problems are not arbitrary. Bitcoin’s protocol was designed, ingeniously, to have the miners process and verify bitcoin transactions—work that requires mining equipment to perform billions of calculations per second. In Bitcoin’s early days—2009 and 2010—one could mine with only the puny power of a laptop’s central processing unit. Today’s expanded Bitcoin ecosystem makes that impossible—the high-powered mining equipment leaves no room for the kid in his bedroom who has downloaded the core mining software and hopes to win a coin. (Specialty mining equipment is readily available online, and even at Walmart. There is, however, a sort of miner arms race in progress. The newest high-powered miners cost between $5,000 and  $10,000.)

P2Pool, with roughly 430 miners taking part, solves a block (or finds a deposit, to continue our analogy) about every twelve hours, meaning that it’s awarded fifty bitcoins, or $25,000, on an average day. Treibick’s own mine earns him a $100 share of that total; the fastest miner in his pool earns $4,000 a day. “That’s a real mine,” Treibick says. “I’m sure it’s in a warehouse with a lot of cooling, probably in Washington State or Iceland.” Iceland, with its inexpensive wind and solar power—not to mention its dire financial condition—is the unofficial bitcoin mining capital of the world.


125 Years To Go

Satoshi Nakamoto designed Bitcoin so that there will be a maximum 21 million bitcoins in circulation. Though 13.3 million have already been minted, solving a block is getting harder and harder all the time; the Bitcoin algorithm is designed so that the final bitcoin won’t be awarded until the year 2140. Those who are mining bitcoin right now are in on the ground floor, or the second floor, of a still-fringy activity that could potentially make them multimillionaires. Theoretically, with that built-in supply limit of 21 million, each bitcoin will grow fantastically in value, and a brisk Bitcoin trade will be conducted in tiny fractions of the currency. (As it stands, one bitcoin can be divided into 100,000,000 parts. The smallest unit is called a Satoshi.)

But as Treibick readily admits, it’s just too early to tell where Bitcoin is headed. An even better digital currency could arise to displace it (for now, competing digital “altcoins” tend to be inferior copies); or an as-yet unknown security weakness could destroy the Bitcoin ecosystem. Some began sounding Bitcoin’s death knell about the time Treibick jumped into the game. In February, the Japan-based Mt. Gox Bitcoin exchange—the largest in existence—dramatically imploded as 850,000 of its Bitcoins went missing. Today, nobody is precisely sure what happened. A hack? Internal corruption? A software glitch, as the owner claimed? “It’s still being investigated,” Treibick says. “I suspect there was foul play. Literally hundreds of millions of dollars just kind of vanished.”

The collapse of Mt. Gox confirmed for many the unruliness of the Bitcoin world. The previous fall, the FBI had shut down the underground website Silk Road, which accepted only bitcoin for wares that included illegal drugs. As the news broke, many learned for the first time what Bitcoin was, and the association was, of course, unsavory. There were even rumors that bitcoin had been used to pay killers for hire. The Bitcoiner’s rejoinder is that cash and jewels can accomplish the same without being demonized, and are less traceable than bitcoin.

In this unsettled atmosphere, Treibick waded forth, extolling the new currency with agile, friendly intelligence. One firm skeptic was the stepfather of Ian’s wife Kim. An electrical engineering professor at Manhattan College, he did his own asking around at the college and returned to Ian with this verdict: “It’s a Ponzi scheme.” Treibick smiles. “It became a mission to convince him that, ‘Hey, this is legitimate and here’s how it works.’” The professor ended up buying five bitcoins. “He said, ‘Well, it’s better than a lottery ticket.’ He’s going to put it away and wait fifteen or twenty years and see how it works out.”

One point everyone agrees on is that Bitcoin is a work in progress, and therefore extraordinarily volatile. (This is one feature of the currency that the hedge funders like; they can profit neatly from market swings.) In 2013, the value of a bitcoin went from $14 in January to a historic peak of $1,242 in November. A Bitcoin fanatic could have turned himself into a millionaire in one crazy year. This year, the Mt. Gox debacle caused a Bitcoin crash, or perhaps a little series of them. “After the collapse of the largest exchange, obviously there was a lot of trust lost, and the price went down,” Treibick says. “We’ve been around $500 for a few months now.” As with traditional markets, Bitcoin prices are only marginally predictable: Bad news, like Mt. Gox, and good news, like the PayPal adoption, have their obvious effects, but otherwise fluctuations occur for no discernible reason. Andreas Antonopoulos, a leading Bitcoin proponent, noted during a recent podcast that Bitcoin is still a very small currency, with little liquidity: “Every time somebody sneezes in the media about Bitcoin, all of the liquidity just sloshes around, and you get these price fluctuations.”

Somebody must have sneezed. During the writing of this article, Bitcoin dropped from $506 to $382, its lowest level since mid-2013. Whether that’s an opportunity to buy low or a harbinger of disaster nobody knows. But the volatility does not phase Treibick, partly because he has also witnessed another Bitcoin phenomenon: resilience. “There are going to be more bubbles, and there are going to be more huge crashes,” he predicts. “I don’t know if Bitcoin will totally fail or become the true global currency that everybody uses. All I know is that the potential is huge.”

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