The battle of Bitcoin

In late 2010, Roger Ver heard about Bitcoin for the first time. A single bitcoin was worth only about 25 cents. Though primed and ready for something like the digital currency, he gave it barely more than a glance. “At the time I remember thinking, ‘Oh, this is kind of interesting, but too bad nobody’s using it, so it’s not worthwhile’,” he says. He put it out of his mind until one morning in February 2011, when he was in the kitchen of his house in San Jose eating a bowl of Wheaties and listening to Free Talk Live, a libertarian talk radio show he liked.

That day, the hosts were discussing Bitcoin. “I googled Bitcoin again while I was having breakfast,” Roger says. “I fully intended to go into my office that day selling Cisco equipment. Didn’t make it to the office that day, didn’t make it the next day, didn’t make it for the next couple of weeks, just went on an absolute Bitcoin binge. And literally I didn’t leave the house for about ten days, and just ordered food to be delivered to my house and just stayed there and read every single thing I could find about Bitcoin.” On 9th February 2011, for the first time ever, the value of a bitcoin had reached parity with the US dollar – an important milestone it then went on to surpass, closing the day at $1.09 on Bitcoin exchange Mt. Gox. (Roger didn’t know it at the time, but a game-changing event had occurred between his first and second encounter with Bitcoin: the opening of an online black market called Silk Road.)

“Bitcoin was not controlled by any government. It was not under the thumb of any big bank. And it was not – at least for now – taxable”

At that time, the Bitcoin community’s major online discussion board, hosted at bitcointalk.org, was still young enough that “you could read every single post on the entire forum, and every single new post each day,” Roger says. And he did. The same intensity of focus that had allowed him to learn Japanese in prison [in 2002-2003 he spent ten months in a medium-security federal prison in southern California,  for selling fireworks illegally over the internet] now helped him to devour the theoretical underpinnings of this maths-based currency. “It was like virtual crack for me. I couldn’t get enough of it.” And like a drug, Bitcoin temporarily compromised his health. For more than a week, caught up in a sort of ecstatic search for knowledge, he slept only one hour a night, like a methamphetamine addict or a religious ascetic undergoing a trial of the flesh. His zeal – or rather, acute sleep deprivation – landed him in hospital. By the time he was released, he had found his life’s calling. It was Bitcoin.

During his February binge, Roger bought his first bitcoins. His company, Memory Dealers, which sold computer parts online, now had about 30 employees and annual expected sales of nearly $10 million. The success of that business allowed him to put money into Bitcoin and, later, into Bitcoin startups. He went in hard. By March, he was asking Memory Dealers’ vendors if he could pay them in digital currency. (One or two of them even agreed.) He began accepting Bitcoin as a payment option himself, hoping to spread enthusiasm for this new form of money, and he added Memory Dealers to the Bitcoin Wiki, an online encyclopedia that included a directory of Bitcoin-friendly businesses. Says Roger, “I was the first website that wasn’t just selling, like, alpaca socks” – an exaggeration but not far from
the truth.

There is a branch of Christian theology known as apophatic, or negative theology, in which God is described only in terms of what he is not, for God is unknowable in his essence. It would be wrong to say that Roger approached Bitcoin in quite that way, but certainly he prized Bitcoin as much for what it was not as for what it was. It was not issued or controlled by any government. It was not under the thumb of any big bank or credit card company. It was not beholden to the whims of any corporate executive. And it was not – at least for now – taxable. Later, he would earn the nickname Bitcoin Jesus for his missionary zeal. He’d had a difficult youth as the son of fundamentalist Christians, and now he was an atheist. But perhaps the proselytising instinct was nevertheless present in him as an inheritance. Blessed is the man who can make a bitter stalk produce the fruit of his choosing. In May, Roger began paying $2,500 a month to have gee-whiz Bitcoin advertisements broadcast on Free Talk Live, which aired on nearly a hundred radio stations in America as well as XM satellite radio. The ads went like this:

Are you tired of watching the value of the dollar plummet? Are you tired of banks charging you fees? Do you want to take back control of your own money? Then take a look at Bitcoin! Bitcoin is the world’s first decentralised, anonymous internet currency, and it’s gaining popularity every day. It’s free to use, free to accept, and free from inflation – forever! You can use bitcoins anywhere in the world, and their value will only grow with time. To learn more, visit weusecoins.org. Again, weusecoins.org.

He also paid $1,200 a month for a billboard along Lawrence Expressway in Santa Clara, which displayed the image of a great golden coin, radiant like the sun, emblazoned with the symbol for Bitcoin – a capital letter B with two parallel vertical lines running through it, as in the US dollar symbol (which is sometimes shown with one intersecting line, sometimes two) – and which advertised Memory Dealers’ acceptance of this “P2P cryptocurrency”. He even convinced some of the Chinese vendors that supplied him with computer parts to accept partial payment in bitcoins. Through it all, he was unremittingly earnest in his evangelism. “Bitcoin prices will only continue to rise if people begin using bitcoins for their everyday transactions,” he insisted. “We should be focusing on making it easy for everyone to use bitcoins in everyday life.”

Roger didn’t consider himself to be investing dollars in bitcoins but rather cashing out his dollars – antiquated inflationary fiat currency, as he thought of it – for a superior form of money. It was, to be sure, a minority view even in that enclave of radical techno-geeks. But these were heady times. The price of Bitcoin was climbing steadily. On 26th May, Roger announced his intention to buy a large quantity of bitcoins – a thousand or more, worth about $9,000 at the time. By 8 June, that haul was worth as much as $31,900. By the end of spring, Roger had gained a certain prominence in the burgeoning Bitcoin community – the seasoned “old man” among disaffected millennials – and so it was only natural, perhaps, that when disaster struck he would take it upon himself to stop the bleeding.

On 20th June 2011, at three o’clock in the morning Tokyo time, a hacker broke into and assumed control of a Mt. Gox account that had vast administrative powers over the exchange, which now controlled 90 percent of the global market for Bitcoin trading. The hacker evidently hoped to raid the piggy bank for all he could get. There was only one thing standing in his way: the daily withdrawal limit. A Mt. Gox user could withdraw only $1,000 a day in digital currency, the equivalent of about 57 bitcoins on the day the hacker broke into the exchange. But if he could drive the Bitcoin price down from $17.50 to a single penny with a massive sell-off and then buy back the cryptocurrency at that depressed price, he could, in theory, make off with 100,000 bitcoins. If and when the price recovered, he’d be a rich man. He began selling like crazy.

On the east coast it was the middle of the afternoon, and traders watched as – thanks to the hacker’s artificial sell-off – the value of Bitcoin plummeted like an elevator with a snapped cable, dropping from $17.50 to $0.01 in a mere half hour. For those who had bet big on the cryptocurrency, it must have been horrifying. But then market forces, of which greed was no small part, kicked in; speculators didn’t know why the price had crashed, but they saw an opportunity to buy thousands of bitcoins on the cheap, and their frantic buying began to drive the price back up, unwittingly foiling the hacker in the process. In the end, he escaped with only two thousand bitcoins, about $35,000 at the former exchange price.

“Bitcoin came into the world as the work of what appeared to be a single brilliant outsider, a kind
of one-man Manhattan Project”

Recognising the threat at last, Mt. Gox’s chief executive, a rotund and awkward Frenchman named Mark Karpelès, halted trading while his staff tried to sort out the mess. Karpelès pleaded with his fellow Bitcoiners to help get the exchange up and running again. Roger, who happened to be in Tokyo’s Shibuya neighbourhood, where Mt. Gox was headquartered, rushed to help the ailing exchange. What he found when he arrived at the Cerulean Tower, the 41-storey glass-and-steel building where Mt. Gox had its offices, was shocking: Karpelès was running the exchange with only two other men, Mt. Gox’s sole employees, who had started just days before. They were overwhelmed. Roger quickly took on a managerial role. And he called an old friend, Jesse Powell, who was also into Bitcoin, for back-up.

“I’m at the Mt. Gox office,” he told Powell. “How soon can you be in Tokyo?” Powell was perplexed. Mt. Gox had tens of thousands of users. How the hell are you running this exchange with three people? he wondered.

Powell got on the next plane out of San Francisco. Roger met him at Haneda International Airport, and together – with Powell’s luggage still in hand – they set up camp in the Mt. Gox offices, determined to help out. It was up to them to save the most critical piece of the Bitcoin ecosystem. Without Mt. Gox, which handled more than 50 times as many transactions as all the other exchanges put together, it would be impossible for most businesses to accept the digital currency and for traders to turn a profit. It would be like turning off the spigot. People would lose interest; the value of Bitcoin would drop to zero. “It was pretty important to me that Mt. Gox survive that,” Powell says. So important, in fact, that he dropped $5,000 of his own money on laptops for the exchange’s staff and volunteers.

There was a lot of work to do. “The truth is that Mt. Gox was unprepared for Bitcoin’s explosive growth,” Karpelès told users. “Our dated system was built as a hobby when bitcoins were worth pennies apiece. It was not built to be a Fort Knox capable of securely handling millions of dollars in transactions each day.” That the world’s most important Bitcoin company was the digital equivalent of something a hobbyist carpenter would hammer together in his garage was a frightening prospect for those who depended on it and wanted to believe in the potential of crypto-money, but it was unsurprising given the way Bitcoin had come into the world – as the work not of a nation-state or university researchers but of what appeared to be a single brilliant outsider, Satoshi Nakomoto, a kind of one-man Manhattan Project. Moreover, the type of people initially attracted by Bitcoin’s open-source, Cypherpunk ethos were almost uniformly young, with more enthusiasm than expertise. “Bitcoin is coming from a bunch of young computer nerds who saw this thing and thought it was neat,” Roger said later. “A lot of the early Bitcoiners are 19-year-old kids, still living at home with their parents, and they don’t have any business experience.” Powell puts it more bluntly: “It was total amateur hour.” And the amateurs had led their peers off a cliff.

Now reinforcements had arrived, Roger and Jesse set to work alongside Karpelès, his employees, and other volunteers, fielding customer complaints and inquiries about the status of their accounts. As if the flash crash and theft weren’t bad enough, Mt. Gox’s database of user information, including names and email addresses, had also been stolen and posted online. Identity theft was now a real concern. “Everybody had to prove they owned the account before they could log back in,” Powell says. “There were clear cases in which people were trying to claim accounts they didn’t own.” To sort it out, he and Roger created a questionnaire with which users could verify their identities. Gradually they worked through the immense backlog of support tickets.

Following the hack, Powell’s faith in the viability of any sort of centralised exchange was badly shaken, though he continued trading on Mt. Gox for another year. For Roger, the whole fiasco was an important object lesson. Within the space of a few months, Bitcoin had transformed from “this joke internet currency that wasn’t worth anything”, as Powell puts it, into something of real value, a commodity worth stealing. If it was ever going to succeed on a grand scale, as Roger dearly wanted, serious companies would have to arise, with competent leadership, to build the necessary infrastructure to support this new form of money. Roger wasn’t a programmer, so he couldn’t build it himself. But he trusted that others could, if they only had the means to do so. And money was something that he had plenty of. He could be an investor. He began looking for Bitcoin startups – anything halfway decent would do – that were in need of seed funding.

“No one had reckoned with how market manipulation might be handled in an industry without regulation nor how costly incompetent leadership might be”

On 26th June, nearly a week after Mark Karpelès had pulled the plug, Mt. Gox went back online, rolling out a new and improved website. With it came a rollback of all post-crash transactions. In essence, the company took a snapshot of its records as they had existed before the crash, and reverted all customer accounts
to that state, like a golfer taking a mulligan after an unlucky stroke. Everybody had the balances that
had been theirs prior to the crash. Any bitcoins snapped up during the crash and which a quick-thinking user had managed to transfer out of the exchange before the exchange were therefore essentially stolen coins. According to Powell, about two thousand coins were pilfered in this way, through miscellaneous customer actions, along with the haul of two thousand taken by the hacker. Mt. Gox would have to cover those losses.

In the wider Bitcoin community and on tech blogs, which had just begun to take notice of this weird thing called digital currency, some people took the security failure as proof that Bitcoin users were foolish to rely on unregulated exchanges operated by strangers in remote parts of the world. After the hack, the value of Bitcoin slowly deflated, a hot air balloon coming back down to Earth. And Mt. Gox paid a price: it lost ten percent of its market share to an upstart exchange in San Francisco called TradeHill.

For the cryptocurrency’s early adopters, this series of unfortunate events represented the end of innocence. No one had reckoned with how theft and market manipulation might be handled in an industry without regulation, nor how costly incompetent leadership might be. There were no authorities to whom one could appeal for redress; there was no backstop to the loss of funds. Roger and Jesse’s esprit de corps was all that saved the troubled exchange – and maybe Bitcoin itself.

Ultimately, in February 2014, Mt. Gox met an ignominious end: it imploded, with hundreds of millions of dollars worth of bitcoins and cash missing. Its CEO, Mark Karpelès, appeared guilty of negligence or worse. Karpelès has blamed hackers for the loss, and pled not guilty in July 2017 to charges of embezzlement and data manipulation in Tokyo District Court. (The disposal of some 200,000 coins remaining to Mt. Gox is the subject of an ongoing bankruptcy case in Japan.) But the cryptocurrency revolution rolls on. Jesse Powell, in fact, went on to launch his own exchange, Kraken, which has gained prominence in the US market. Roger Ver, for his part, became in 2017 a figure of high controversy for promoting Bitcoin Cash, a rival “fork” of Bitcoin that claims to be the true realisation of Satoshi Nakomoto’s original vision for peer-to-peer electronic money. The rivalry’s outcome remains uncertain.

Posted on Friday, November 10th, 2023 - Categories: #29 - Oct-Dec 2017, App Issues.