‘Chancellor on brink of second bailout for banks.’ That front-page headline, from the Times on 3 January 2009, is forever inscribed into the history of digital currency bitcoin. Bitcoin’s creator, Satoshi Nakamoto, wrote the headline into the ‘genesis block’ of bitcoin – the first-ever block in the innovative ‘blockchain’ that makes the coins work.
No one quite knows why he picked that phrase. The day’s newspaper could just be a way of proving or marking the date. But did Nakamoto also, perhaps, intend it is a reminder of bitcoin’s origins after the financial crash of 2007-8, as an alternative financial system beyond the reach of governments and big banks’ corruption?
‘The root problem with conventional currency is all the trust that’s required to make it work,’ he wrote in 2009. ‘The central bank must be trusted not to debase the currency, but the history of fiat 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.’ By contrast, his new design, he said, was ‘a distributed system with no single point of failure’.
All we know about Satoshi’s intent is contained in his original design document and a collection of fragments. ‘Satoshi’ was a pseudonym, with posts focusing almost entirely on the technical aspects of the system, and whoever was behind it disappeared from the internet in 2011. Despite intense journalistic interest, his identity still has not been revealed.
But we do know – because bitcoin balances are publicly visible – that Satoshi has an estimated million bitcoins under his control. With the price of a single coin having last week soared over $15,000 (£11,000), Satoshi is on paper a multi-billionaire: one of the richest people in the world. Yet still the coins sit in his publicly-visible online ‘wallet’, keenly watched, unmoving.
As bitcoin’s price continues to rise, up over 1,000 per cent this year alone amid a frenzy of speculative buying, and word spreads beyond its initial techno-utopian followers into everyday society and traditional finance, it is Satoshi’s original vision of ‘a peer-to-peer electronic cash system’ that has paid the price.
Nick Szabo – who is considered one of the prime suspects for Satoshi Nakamoto’s secret identity, though he strongly denies it – worked on a technological precursor to bitcoin called ‘bit gold’. He suffered most of all, back then, from a lack of interest in his ideas. In 2011, Szabo wrote that ‘While the security technology is very far from trivial, the “why” was by far the biggest stumbling block […] Nearly everybody who heard the general idea thought it was a very bad idea.’
It was considered a bad idea because – and this argument is still deployed against bitcoin by some critics today – it seems obvious that a load of data (‘bits’) on a computer is not money (‘coins’). Most people can happily accept that data represents money, on a bank’s central computer for example, but bitcoin requires us to believe that a DIY version of this database – held on many ordinary people’s computers and secured with complex cryptographic maths to make sure no one is lying about their balance – is not only a representation of money, but money itself. ‘Money just doesn’t work like that, I was told fervently and often,’ wrote Szabo.
So before bitcoin could develop as a technology, it had to develop as an ideology. Bitcoin proponents’ key argument – as much a political idea as an economic one – became the idea that paper money, the cash we use every day, has no more inherent value than a newly created online system. Currencies like the pound and dollar are ‘fiat currencies’, with ‘fiat’ meaning that they have value because a government says so. Instead of being backed by governments (or the traditional alternative, precious metals such as gold), bitcoin would be backed by a combination of the technology itself and a large enough group of people’s belief that the technology is money. If enough people believe something is money, as if by magic, it becomes money.
Nakamoto combined some previous academic work on digital currencies by Szabo, Wei Dai, Hal Finney and others with ingenious solutions to some long-standing mathematical problems with the proposals, and launched bitcoin into a newly receptive environment as the financial crisis hit its peak. The original whitepaper describing the idea was published in October 2008 – the month after Lehman Brothers filed for bankruptcy. By the time bitcoin launched at the start of 2009, as the genesis block reminds us, the bank bailouts were in full swing.
If you’re an ideological libertarian, as Szabo is and as many of bitcoin’s early supporters were, you believe the world would be better off without governments, which are corrupt and corrupting of all they touch. As governments effectively tied themselves together with the ‘too big to fail’ banks, a radical-left and libertarian-right critique of this system came to share at least some points in common.
Technology journalist Adrianne Jeffries wrote about attending the first Bitcoin World Conference in 2011, which had ‘75 attendees, mostly long-haired programmers and pasty cypherpunks’. (She noted too that it was very male, as the world of bitcoin generally continues to be.) She saw an interesting parallel: ‘The mix of competence amid chaos reminded me of another humanist experiment: the early Occupy Wall Street occupation, which had an overlapping constituency. Like Bitcoin, Occupy Wall Street attracted many fringe elements, but its core organisers were clear-headed revolutionaries.’
Bitcoin was clearly one of the tributaries that flowed into the 2011 Occupy movement. Occupy Wall Street, politically diffuse but aimed squarely at the banks who had got away with causing a huge crisis, accepted donations in bitcoin from its early days. While Occupy tended towards inchoate leftism, it was drawn widely enough to include libertarians, hacker collective Anonymous, and similar groups. There was no official link between Occupy and bitcoin in either direction, but neither could do anything ‘officially’ – the two were both decentralised movements, of a sort. They felt, at the very least, like products of the same moment in history.
It was shortly before Occupy that Wikileaks started taking donations in bitcoin, after the site’s revelations angered the US authorities and credit card processors shut down donations. Bitcoin allowed the site to keep running, thumbing its nose at the authorities. Satoshi himself appealed to Wikileaks not to do it, but they went ahead anyway, and brought a new level of notoriety to the currency in the process. (One of Satoshi’s last posts before he disappeared said: ‘Wikileaks has kicked the hornet’s nest, and the swarm is headed towards us.’)
The first time I bought (and sold) a bitcoin, in 2011, I did it using ‘Britcoin’, a now-defunct bitcoin exchange that was the first to accept British pounds. Britcoin – though I didn’t know this at the time – was run by Amir Taaki. An avowed anarchist, Taaki was once one of bitcoin’s main developers, and was keen to keep the currency underground and make it more anonymous. Despite coding in various London squats, he was once named one of Forbes’ ‘30 Under 30’. After suddenly disappearing, Satoshi-like, in 2015, he later turned up in Rojava fighting for the YPG, and tried to introduce the Kurdish revolution to open source software.
These are the sorts of figures who were early backers of bitcoin – anti-systemic, sometimes politically hard to define, internet freedom-fighters often previously involved in the peer-to-peer and open source movements.
Early bitcoin exchange MtGox, which collapsed after suffering a massive robbery, was originally coded by Jed McCaleb – previously responsible for file-sharing software eDonkey2000, which introduced many of the advances in file-sharing software still in use in today’s Bittorrent. Mark Karpeles, the unfortunate programmer who took over running the exchange and has had to see it through bankruptcy, was better known to many as ‘MagicalTux’ – Tux being the cute penguin that serves as the mascot of open source software Linux. MtGox had originally been intended not to trade bitcoins, but Magic the Gathering cards (which are a bit like Pokémon cards, but somehow nerdier).
One of the first prominent acts of outright speculation on bitcoin’s price came from Rick Falkvinge, founder of the Pirate Party in Sweden, the first country to have such a party. Falkvinge’s party is ‘neither left wing nor right wing’, but in favour of free culture, severe cuts to copyright law, and internet privacy. In 2011, Falkvinge publicly announced that he had put all his savings into bitcoin, at a price of $8.30 per coin. He called bitcoin ‘the Napster of banking’, hailing the end of ‘gatekeepers in the financial system’.
Clearly enthusiastic about the technology, Falkvinge’s biggest reason for going ‘all-in’ was nevertheless bitcoin’s incredible price increases, with the cost of one coin in 2011 having bought more than 1,000 coins in 2010: ‘I challenge you to find one other commodity with this pace of appreciation. And there’s no indication it’s slowing down or saturating. Quite to the contrary: interest is picking up.’ We don’t know how much Falkvinge put in, or exactly how much he may have sold or lost in the meantime, but we do know that bitcoin has seen another thousand-fold increase since then.
Bitcoin’s price growth, however, has had several unintended consequences. Foremost among them is the problem of climate change: this thing is an energy monster. The bitcoin network’s electricity use rises every day, and now consumes more power each year than the whole of Ireland.
The spiralling energy use is caused by a flaw in bitcoin’s original design. Securing that distributed database of transactions, without anyone needing to trust anyone else, is a hard problem. What if some faker comes along and sneakily tries to spend the same coins twice? Before bitcoin, this was one of the central problems stopping digital currency from working.
Bitcoin solves this problem using what’s called ‘proof of work’, based on cryptography (this is why it is sometimes known as ‘cryptocurrency’). Computers in the network take part in what’s described as ‘mining’, but is really about solving a very difficult series of maths puzzles. Whoever finds the right answer wins that ‘block’ of transactions, and gets a reward in bitcoin: currently 12.5 BTC – around £150,000 – plus the transaction fees paid in that block. Each new block is mathematically tied into a chain with the one before: a ‘blockchain’.
Mining is competitive, yet fixed in time: the difficulty is automatically adjusted so that someone will solve a block every ten minutes on average. Throwing huge amounts of computer equipment at the problem, especially bitcoin-specific chips (ASICs) whose existence Satoshi doesn’t seem to have foreseen, is like buying up huge quantities of tickets for the lottery-like process that gives out the next lot of coins. The further the bitcoin price soars, the more equipment and electricity it becomes profitable to burn. Now, a network that was once running successfully on ordinary people’s home computers is dominated by a few huge mining farms – with those massive carbon emissions.
Can’t they just fix it? Unfortunately there is no ‘they’. Like Frankenstein’s monster, bitcoin has slipped out of its creators’ control: its trustless design intentionally has no ‘off’ button. This problem of centralisation and waste, and related issues such the number of transactions possible per minute (the ‘block size’ debate), are bones of vicious contention in the splintering bitcoin community. They are intricately linked to questions of the currency’s purpose, and who should be in control of it – what should the balance be between developers, miners, exchanges, and users, and how should differences of opinion over bitcoin’s future be resolved? Despite the early idea that the network could be self-governing through code and consensus rules, in practice a series of splits have made bitcoin more bewildering to newcomers, created bitter rivalries between the warring camps, and got basically nowhere towards solving the original problems.
Until the current round of price frenzy, most mentions of bitcoin in the media were about some kind of cyber-crime. Bitcoin appeals to shady types for the same reasons it appeals to anti-authoritarians: while it is far from untraceable, it is relatively hard to track and – perhaps more importantly – transactions are irreversible. Sending a transaction to the wrong place works like sending an email to the wrong person: after some frantic Googling and button-pressing, you realise that there really is no ‘undo’ button. For fraud victims it’s a disaster; for fraudsters, a goldmine.
The crime perhaps most associated with bitcoin is ‘ransomware’: viruses like Cryptolocker and WannaCry that encrypt your files and then demand a payment in bitcoin to give them back, as happened across the NHS earlier this year. It has also been the de facto currency of darknet markets, where people can buy drugs and other illegal things (though still have to take the big risk of giving out a postal address for them to be delivered to). But the truth is that such illicit users are moving away from bitcoin, for a simple reason: as the price rises ever further, it no longer functions as a currency.
A common meme, especially on Reddit, is that if you hold (or in meme-speak, ‘hodl’) bitcoin for long enough then you’ll be able to buy a ‘lambo’ – that is, a $200,000 Lamborghini. It has happened. But looked at another way, the lambo illustrates the problem. If you have come to believe that bitcoin can only ever go up in the long term, then even that lambo owner has lost out – the price of bitcoin has gone up by enough that they could have bought ten lambos for the price they paid for one.
This is what’s being called the ‘million dollar pizza’ problem, in honour of Laszlo Hanyec, who bought two pizzas back in 2010 for 10,000 bitcoins. He feasted his way into history as the first person ever to spend bitcoin on a real-world item, only to watch the dollar value of those coins soar over the years. (It’s currently $150 million.) What started as a fun piece of bitcoin lore is nowadays read as a cautionary tale. Who wants to spend a currency that might, someday, be worth a huge multiple of its current value?
With no way to increase the money supply, and a built-in all-time supply cap of 21 million coins even as more people pile into the currency every day, bitcoin is hyper-deflationary. Deflation – a rarer problem than its opposite, inflation – encourages hoarding, because you expect that your money will be worth more in the future than it is today. Bitcoin has become a sort of reverse Weimar Republic.
The current speculative frenzy has also seen transaction fees rise to huge levels, partly because of congestion on the network – absurdly, all that wasted extra computer power doesn’t increase the maximum number of transactions it can handle per minute – and partly because the fees are priced in what were once considered tiny fractions of a bitcoin. If you were already reluctant to spend your coins, a £20 transaction fee is hardly going to help matters. Few people now spend bitcoin in the few shops that accept it, and online gaming service Steam – a natural constituency for cryptocurrency – has stopped taking them.
As spending is de-emphasised in favour of speculative ‘investment’, with bitcoin evangelists saying it is less a currency and more a ‘store of value’, more and more people are keeping their bitcoin on exchanges and other sites that act as a central authority – basically like banks, only without any guarantee that they won’t just up and disappear tomorrow.
‘Bitcoin was supposed to disintermediate the finance industry – the system of banks and middlemen and transaction fees in which a single entity can hold your money hostage,’ says Adrianne Jeffries. ‘Instead, it replicated this system and made it worse… Bitcoin is now a get-rich-quick scheme that retains none of the exciting, anarchist features it proposed and has created a secondary economy with financial shenanigans that mirror the ones that led to the global financial crisis.’ In other words, she argues, Bitcoin ‘got Wall Streeted’.
While it becomes ever less useful as currency, bitcoin has spawned a new kind of participatory speculation: anyone can hold this unregulated, viral asset class, with a range of advocates who range from cyber-utopian to get-rich-quick con artist. Almost everyone buying bitcoin now is hoping to make money on the price going up even further. The techno-social experiment has passed over into pure greed.
As news of bitcoin breaking the $10,000 barrier spread, exchanges reported all-time highs in web traffic, some breaking under the strain, with record trading volume and reports of hundreds of thousands of people opening accounts every day. The more media chatter there was about the ever-rising price, the more people turned up to make it a reality, with bitcoin breaking $15,000 just a week later.
As the price peaked, there were terrifying tales of people putting in their life savings – even though it’s really easy even for experts to accidentally lock their bitcoins away from themselves, throw away the wrong hard drive, or choose an easily-guessable password phrase (even if it sounds obscure) and end up getting all your coins stolen.
Some newly minted bitcoiners got a rude awakening almost immediately. After hitting over $17,000, bitcoin fell back to $14,000 and continues to look highly unstable. Bitcoin transactions take ever longer as the network gets clogged, and buying and selling coins for real/fiat money can take days, yet the price can move by thousands of dollars in an hour even on an ordinary day. If (when?) the crash comes, it will happen too quickly for most people to react.
No one knows exactly what causes these wild price swings. The bitcoin market is scrappy, global and mostly unregulated, and many price-moving transactions take place in exchanges away from the publicly visible transaction records. There are occasional whispers about ‘whales’ – holders of large amounts of bitcoin whose trades can move the price – but evidence is thin on the ground.
Either way, the various methods of market manipulation that are outlawed in most countries’ public markets are allowed to roam free in the unregulated world of cryptocurrency. There are are frequent accusations of ‘wash trading’: buying and selling the same thing to and from yourself to make it look like it’s in demand. Order spoofing, where someone puts in a big order to try to move the price and then cancels it before it goes through, is downright easy. Pump-and-dump groups, which collude to push up the price before selling, operate with impunity. Exchanges claim to ban insider trading by employees, but it’s not a crime – and prices have a tendency to move up before big announcements.
Almost every kind of scam ever committed in a trading market is possible in this new wild west of finance. While some of these acts may still be illegal in a particular country’s legal system, the authorities are having enough trouble catching people using cryptocurrency for outright robbery, so it’ll probably be a long time before they start going after market manipulators. There is no single ‘bitcoin price’ – just an average from lots of opaque exchanges, each of which is subject to who-knows-what trickery from its traders, or could even be messing with the price itself.
But concerns about how easily bitcoin’s price can be manipulated haven’t stopped the real-world regulators from letting traditional finance get in on the action.
Remember the Winklevoss twins? The rowing-enthusiast brothers, last seen as the butt of the joke in Facebook movie The Social Network, are back – and they’re widely reported to be the first bitcoin billionaires.
More importantly, though, the ‘Winklevii’ have been at the leading edge of trying to create a portal between the cryptocurrency frontier and old-fashioned high finance, by repeatedly seeking regulators’ approval for bitcoin derivatives. After a few false starts, the brothers have just managed to do a deal to create the world’s first bitcoin futures trading market with CBOE, the largest US-based options exchange, giving Wall Street and the City a shot at getting in on the bitcoin betting.
It’s not just the twins, though. Mainstream finance is falling over itself to prepare ways into bitcoin for more traditional investors (rich people and institutions) who don’t know how to use a cryptocurrency wallet and don’t want to know. Others interested in bitcoin futures include CME, also launching this month, Nasdaq and the Tokyo Financial Exchange. The futures trading could open the way for an ETF (exchange-traded fund), letting big speculators buy and sell bitcoin on the markets like any other stock. There are already more than 120 cryptocurrency hedge funds.
Izabella Kaminska, editor of the FT’s Alphaville, fears that the creation of a bitcoin futures market risks ‘the sort of anomalies that distort price discovery until the mother of all corrections can occur’. That’s a financial-jargony way of saying it could cause bitcoin’s price to soar further, and then crash. Kaminska sees bitcoin overall as a ‘shadow banking’ system – unregulated private money creation – similar to the one that sparked the financial crisis. Thomas Peterffy, known as ‘the father of high-speed trading’, took the warnings a step further, buying a full-page ad in the Wall Street Journal to warn that ‘a catastrophe in the cryptocurrency market that destabilises a clearing organisation will destabilise the real economy’ – not just the people who trade in bitcoin futures, but ‘the financial system as a whole’.
But such concerns are being drowned out in the rush to integrate cryptocurrency into the financial system. Foremost among the bitcoin ‘bulls’ is Michael Novogratz, a billionaire hedge fund manager whose pronouncement that bitcoin would hit $10,000 a coin is widely credited with helping it to happen. Novogratz, who calls cryptocurrency a ‘speculator’s dream’, has set a new price target: $40,000. Other estimates are even higher – $100,000, $1 million. Or, as bitcoin booster Naomi Brockwell told Fox Business: ‘It’s going to the moon!’
If it doesn’t, then a lot of people who have thrown in money on the near-promise of 1,000 per cent returns have been sold a pup. Worse, if the moon rocket blows up in the atmosphere and falls back to earth – if the market collapses, or one of bitcoin’s many rivals wins out, or a bad enough security hole is found in the bitcoin software – their losses could be truly enormous. Either way, it won’t be Wall Street that feels the pain.
Back in 2014, when bitcoin exchange MtGox collapsed, the coins were worth a fraction of their current price. Yet comments on the BitcoinTalk forum give a sense of the scale of some people’s losses. ‘That was most of my retirement money’ ($122,000 loss). ‘It will be a complete disaster for me if it is stolen’ (100,000 euro loss). ‘Me and my girlfriend was going to buy a house and start a family’ ($49,000 loss). ‘I’m a student and this is almost all of my money I have left’ ($7,800 loss). ‘I haven’t slept in days and haven’t been able to tell my wife how much I’ve lost’ ($300,000 loss).
This time it’s on a whole new scale – and bitcoin’s tragedy will turn into some terrible real-life tragedies.
Still, however high the price rises, Satoshi Nakamoto’s million coins sit unmoving. They stand as a rebuke: unimaginable riches, left on the table. They seem to say ‘getting rich was never the point of this’. But, equally, they could be telling us that Satoshi is dead, or lost access, or – I like to believe this last one – deliberately destroyed the keys to his fortune.
Perhaps Satoshi is not entirely blameless for all this, though. His apparent libertarian worldview – the idea that free markets could work if only they were truly free – surely contains within it the seeds of bitcoin’s downfall. Bitcoin’s chaos is not an aberration: it is what the market looks like when it is unleashed.
I no longer have any bitcoin. As more and more people board the bitcoin moon-mission, no longer excited about the strange magic of a new kind of internet money but instead hoping to get filthy rich, I can’t help but feel it will all end in disaster. Unfortunately there is no shortage of venture capital backed hucksters willing to sell shovels for this new digital gold-rush. As Amir Taaki put it, most of bitcoin’s one-time idealists have become ‘a bunch of sell-outs’.
A movement that started out as explicitly adversarial to big finance is now, gradually, being embraced by it. A fixed money supply, which Satoshi said was designed to avoid credit bubbles, has sparked a huge price bubble. An invention intended to replace traditional money has been reduced to a speculative scheme to amass more dollars and pounds. What once felt like a piece of the future is now burning through enough energy to help destroy that future. And this new kind of currency, born out of the financial crash, could be sowing the seeds of the next one.
This is part one of ‘Bitcoin and beyond’. In the next part, we’ll look at how the next wave of cryptocurrencies let you run code on your ‘coins’ – and have accidentally started a billion-dollar bug hunt. If you liked this article enough to stomach the transaction fees, you can make a donation to Red Pepper in bitcoin by sending to 1L6mmkGqFk