For his book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, New York Times reporter Nathaniel Popper spent a year interviewing more than 300 people. They were programmers, cryptographers, investment bankers, venture capitalists, and libertarians: an eclectic assortment of people convinced (or near-convinced) that a decentralized, digital currency could remake money and finance as we know it.
Since its introduction in 2009 by a likely pseudonymous programmer named Satoshi Nakamoto, Bitcoin has been an experiment testing that idea. The currency has risen and fallen, Popper explained via phone; it’s survived near-disasters and convinced at least some skeptics of its viability. But, he says, its future is far from certain.
The following interview has been edited for length and clarity.
I imagine by now you’re tired of repeating yourself on this, but as someone who’s spent a lot of time thinking about Bitcoin, how do you explain what it is and why it’s important?
It’s actually evolved. There are so many ways to describe it for different people who are coming from different places, so it helps to start from different points. The way I’ve been describing it recently is as digital cash. It’s helpful to understand that’s how it was originally envisioned; cash lets you make a direct transaction with somebody. There’s no middleman; they have the cash and you don’t, and the transaction’s over.
That quality didn’t make it over to the digital world. When you get to digital transactions in the digital world, you always needed somebody do the transfer for you, and make sure you had enough money, and update the record. Bitcoin grew out of all these experiments to find a way to have a digital transaction that was just direct.
One side-benefit of that was that, with cash at least, it was anonymous. The idea with Bitcoin, at least initially, was that it could be done without a middleman watching. There’s a lot of complicated technology behind it, but that’s the initial idea. I think once you understand that, a lot of the other implications of Bitcoin become more clear.
One of the points you make in the book is that when it came time to sell Silicon Valley investors on the idea of Bitcoin, they were wary because previous experiments in digital cash had failed. What made Bitcoin different?
Previous efforts at digital cash had generally still relied on some sort of middleman. I think perhaps the most ambitious experiment in that was PayPal. Back in the ’90s when they were first created, they wanted to find a way to make this online cash token, PayPal money, that could move and was worth something in real dollars but existed independently of central banks. But PayPal was still the middleman in that. They still had to be keeping track of the transactions. And a lot of other efforts similarly moved away from banks but still had some sort of middleman, and that middleman could be monitoring those transactions, or the government could ask for that data.
“Really the financial industry has become this string of middlemen who are charging for services to complete transactions.”
So I think that’s where a lot of earlier experiments failed. The other issue is how to get people to value it. This new online token—why should anybody think it’s worth anything? There were a lot of experiments among cryptographers and programmers that created an online token, maybe even one without a middleman. But OK, it exists, but why should anyone use it? Why is it any better than a dollar? Why should I think it’s going to be worth anything in two months?
I think those were the big shortcomings of the predecessors. To some degree it’s still not clear whether Bitcoin overcomes those problems, but it especially wasn’t clear early on whether it would. It took two or three years before anyone with serious money and a reputation decided to attach themselves to this.
When PayPal started to be roped into the existing financial regulatory regimes, cofounder Peter Thiel found that oppressive, and it became one of the reasons he left the company. He returned to this idea of digital cash when Bitcoin arrived. Besides potential anonymity and avoiding government surveillance, what are some of the other implications of digital cash that bring people like Thiel back to the idea?
I think those are the sexiest reasons, and the most easily comprehensible. Among the sexy reasons is also that anonymity allows for illegal transactions, and obviously there are a lot of black market transactions in the world, and people looking for ways to move money more easily. Bitcoin seems to offer some promise there, which obviously came out with the Silk Road.
I think some of the other implications are in some ways more boring but also broader. Essentially, when you have middlemen in transactions, it costs money and it adds risk into every transaction, because that middleman can steal the data; they can get hacked and lose the data. If they go out of business while holding the money, the money’s gone and neither the buyer or seller can get it back. They obviously charge for their services—really the financial industry has become this string of middlemen who are charging for services to complete transactions. Part of what people slowly realized over time with Bitcoin is that this is the first time we can digitally complete a transaction without a middleman to collect money and add risk into the equation.
That has a whole bunch of implications that are quite broad. They can be a little boring—it’s stuff like settlements of stock trades. This is when these boring words come up that are not necessarily that interesting to the ordinary person, but it’s where much of the money in the financial realm is made. The simplest version of this is online and credit card payments that ordinary people use. That’s a big industry, and American Express and Visa charge big companies, you know, 2 percent of every transaction to do that, because they’re standing in the middle and making sure the transaction happened. If you could find a way to not have someone stand in the middle like that, and just make sure the transaction happened, it becomes a lot cheaper. It becomes like cash.
So I think those are the things that people like Peter Thiel—he has remained more ambivalent on Bitcoin than a lot of Silicon Valley folks—but people like him, people with a lot of money, I think that’s what has gotten them so excited.
One of the fascinating things in your book is how at different times, different subsets of Bitcoin believers have come to its rescue, or they’ve become a driving force in its adoption. You quote former equities analyst and current Business Insider Editor-in-Chief Henry Blodget: “One of the things that’s most fascinating about Bitcoin, I have learned, is that it entrances fanatical conspiracy theorists, clear-eyed pragmatists, and diehard skeptics alike.” Tell me a little bit about those different constituencies and how they’ve helped keep Bitcoin afloat.
At the very beginning, you had this group of people who had been experimenting for years with this, and many of those people were privacy activists—WikiLeaks-type people. They gathered under the name cypherpunks in this online group back in the ’90s. That probably includes Satoshi Nakamoto, whoever Satoshi is, but they were the ones who were playing with this when it really wasn’t worth anything, and there was no sign that it was necessarily going to be worth anything. If they hadn’t played with it and kept the network going, it would have died there in the first year and a half. Because it was really worth nothing, and there was no incentive for people to join in. Yes, you’d get bitcoins, but you couldn’t do anything with them—so you kind of had to do it for the spirit and the idea of it.
“Before the Silk Road, you really couldn’t do much with a bitcoin. Once the Silk Road was around you could buy a lot of things with Bitcoin.”
I think the next really important group was the libertarian, anti-authoritarian, anti-establishment crowd. In the United States, I think that was a lot of libertarians; in Europe, it might have been more the Occupy crowd that was anti-corporate. These are people who didn’t necessarily understand the technology—they weren’t necessarily programmers—but they understood the implications of money that wasn’t generated by governments and didn’t require any middlemen. It’s kind of this absolute freedom. These people were investing in Bitcoin when, again, it wasn’t worth very much and it seemed like it might die at any time. But these people wanted to see it survive for their political reasons.
I count Ross Ulbricht, founder of the Silk Road, in that group. He was very much motivated by the fringe-of-libertarianism, voluntarist way of thinking that believes people should be free to transact in whatever way they wanted and shouldn’t be limited by government rules. These were people who were buying up large amounts of Bitcoin and, in the case of Ross, starting the Silk Road and providing a use for Bitcoin. Before the Silk Road, you really couldn’t do much with a bitcoin. Once the Silk Road was around, you could buy a lot of things with Bitcoin—most of them illegal, but that was something you couldn’t do before.
You had a big price spike during 2011 that brought in some people who just thought it was a good investment. And it crashed after that first spike. Really for a year after that, the price was going down—it wasn’t just not worth anything; it was actually going down. If you owned Bitcoin, you were losing money, not just not making money. That was kind of a crucial period in Bitcoin’s existence, where if everyone had just said, “Screw it, I don’t want to lose my money. I’m out of here,” it would have died. So these folks—the Silk Road people who wanted to buy stuff there and the political folks who wanted it to survive—kept it alive when it very nearly died.
Those are the two early groups. There have been more since, but in some ways those are the times when it could have most easily died.
What did you think of Ross Ulbricht receiving a life sentence?
It wasn’t surprising that he got life. This was one of the most wanted criminals in the country for years. And he really started a new way to conduct an illegal market. The government very much wanted to send a signal with this, and the prosecutors made that clear, and the judge made that clear. This could be the beginning of something big and new and hard for the government to control. I think probably it’s too late for the government; these markets still exist, because once that idea was out of the bag, there’s a lot of money there. People are continuing to play with that, and those markets continue to exist. So maybe the government’s going to fail with that deterrent after the fact.
I was shocked and I think a lot of people were shocked to realize that this kid—OK, this 31-year-old “kid”—is never going to see the outside world again. Through the trial and through a lot of other things, people have gotten to know him in a way that you don’t always with criminals. And he was doing this for idealistic reasons. He really didn’t seem primarily motivated by money. He really did seem motivated by this desire to create a new kind of market and give people the freedom to do what they wanted to do, and maybe make drug transactions a little safer than doing them on the street. That’s just … jarring … that someone who is not acting out of malice is punished this way.
“It is still very unclear what this is going to be, and how broadly it’s going to be used. And whether it’s just the ideas behind Bitcoin that are going to matter, or Bitcoin itself.”
One of the interesting things we saw in the sentencing was Ross Ulbricht’s letter to the judge sort of begging for 20 years. He actually talked in that letter about thinking he had made a mistake; he didn’t realize what he was doing, and he didn’t realize the danger of what he was doing. I haven’t seen a full discussion of that yet, but I think it’s interesting to think that maybe he doesn’t any longer believe in the ideas that motivated the Silk Road. Obviously there’s a good chance he did that because he had to, and that it wasn’t honest. But there is this question of—whether he deserved his sentence or not—does he still believe in those ideas or not. I think that’s going to be interesting to find out at some point.
One thing that came out of the arrest: The FBI declared that there was nothing per se illegal about Bitcoin.
At that point in time, Bitcoin did want to separate itself from this illegal activity. Among this new generation of people who weren’t about the ideals, but about the business potential, they viewed the arrest as a good thing. They wanted to create a line and say, “That’s not what Bitcoin is.” And the government played its part in that and said, “We recognize that Bitcoin can be used for this, but that’s not the only use.” I think that was part of the reason the Bitcoin market responded well to his arrest.
What’s the status of Bitcoin right now? There are investors putting their money into it; at the same time, there are reports of technical issues. Has it stabilized given its earlier travails?
I actually think it’s still very much up in the air. The price has been stable for a while, but it is still very unclear what this is going to be, and how broadly it’s going to be used. And whether it’s just the ideas behind Bitcoin that are going to matter, or Bitcoin itself. There are all these Wall Street investments, Wall Street banks trying to think about ways to use this—to send money around the world. Goldman Sachs is getting involved; the New York Stock Exchange. But nothing has really come of that, and I think there’s still question whether anything will come of that. I think it’s holding steady in a state of uncertainty, and at some point it’s going to break one way or the other. It’s still very much a market that’s speculating on the future potential of Bitcoin, and it’s not clear what potential it’s going to live up to.
What do you think are some roadblocks for it?
The roadblock for Bitcoin is always confidence. People need to believe in it and believe it’s going to be useful. When companies go down, when there are problems—even if they’re not with Bitcoin itself, that hurts Bitcoin. When Mt. Gox went down, that wasn’t a problem with Bitcoin software. It was a problem with the way people were using Bitcoin. So things like that can happen and really destroy confidence for a long time—long enough that it doesn’t get the new followers it needs, or the banks back away because it’s too radioactive. Still there are a lot of dodgy operations out there that if they lose people’s money, it could be a real issue for confidence.
I think the experiments that financial institutions are doing right now are very important. If they’re successful, that could lead to a much broader uptake of Bitcoin. It might not be in the way the creators imagined, but that could drive the future of this. So you have to look at what the roadblocks are for that kind of implementation. That’s where you get into the more technical issues. One thing that people are looking at right now is the scaling of Bitcoin: Can you make it so it can handle more transactions more quickly? You have this other issue with the centralization of mining operations: The people who are mining the bitcoins and supporting the network become a concern if you end up with two or three corporations who are controlling the mining; you’re back to a centralized world. A few people or companies control where this thing goes. So those are some of the issues you have to look for.
I’m still optimistic that it can be lots of things to lots of different people. People like to make the comparison with the Internet. Initially with the Internet, people had this debate about whether it was going to be about communication, or publishing and information, or a new way to network companies. It ended up being all of those things. To some degree, Bitcoin is described as a sort of Internet for money. A way to keep track of money, to have messaging about money, to loan money, to send money. So with the open-source technology, it could be many things.
When it comes to the value of the bitcoins themselves, everyone’s trying to own the same thing. Maybe that’s sort of more comparable to Internet bandwidth: You need companies that build a lot of bandwidth. In the case of Bitcoin, you need companies that own a lot of bitcoins and are willing to pay a lot for them. But maybe bitcoins become more like bandwidth than as a currency. You own them as infrastructure rather than as a way to trade.
Photo via Nathaniel Popper