Being at the opening of the world’s first Bitcoin conference was like showing up for the first day of camp—a boys’ camp—and finding that everyone already knew one another in an alternate universe. For a couple of days in August, the Roosevelt Hotel in New York City served as a real-world meeting place for about 50 people who had spent months riffing with one another on the phone, in chat rooms, and over Skype. They came to talk about how Bitcoin could change the world—and how it could make them rich.
Bitcoin is a digital cryptocurrency designed to resolve the discord between the way we move money online and the decentralized nature of the Web. The Internet has already eliminated other barriers to communication and trade, such as time and geography. You can browse Moroccan floor tiles in a virtual showroom at 3 a.m. on Christmas Eve if you feel the urge, but paying for your purchase will inevitably require the cooperation of a third party. The problem is that dollars do not exist on the Internet, only promises of payment that require the backing of trusted and centralized financial surrogates like banks and credit cards.
On Halloween in 2008, a hacker operating under the pseudonym Satoshi Nakamoto published a paper that described an entirely new currency called Bitcoin, which was made out of information instead of paper. In Satoshi’s system, all the tasks performed by banks and credit cards, and even some chores of the federal government, were trusted to a peer-to-peer network instead.
Satoshi ducked into the shadows shortly after delivering the code that generates and processes Bitcoins, but new programmers, lured by the vision, quickly stepped in to shepherd the software development and create supporting websites and applications. In 2010, enthusiasts founded a website called Bitcoin Market, which allowed individuals to exchange Bitcoins for dollars and, for the first time, provided a way for curious investors to participate.
Soon after, a Bitcoin owner known on forums as “Laszlo” forked over 10 000 Bitcoins for a pizza—a notorious exchange now regarded as the first time anyone used Bitcoins to purchase physical goods. As more people became interested in the new currency, the value of Bitcoins continued to rise, culminating in a media feeding frenzy in the spring of 2011. The commotion seems to have enticed new speculators that temporarily drove the price even higher. When he bought his pizza in 2010, Laszlo spent about US $25 in Bitcoins. At the Bitcoin conference on 19 August, Laszlo’s meal would have set him back over $100 000 at the new Bitcoin trading rate.
But what exactly is Bitcoin? That was the first question Jeff Garzik, a developer for Bitcoin and Linux Kernel, asked when it was his turn at the podium. “You’d be surprised at how difficult that is to answer,” he said. He began to poll the audience. Is Bitcoin a currency? A commodity? A security? Hands went up and down with each term, and the only time the room agreed affirmatively was when Garzik asked whether Bitcoin is a “distributed digital notary service.”
If you’ve never heard of Bitcoin, watching this video put together by the Bitcoin community is probably a good place to start. The simplest way to understand how Bitcoin works is to think of it as a digital transaction log. Imagine a bunch of people at a table who all have real-time access to the same financial ledger on laptops in front of them. The ledger records how many Bitcoins each person at the table has at a given time. By necessity, the balance of each account is public information, and if one person wants to give part of his wallet to the person sitting across from him, he has to announce that transaction to everyone at the table. The entire group then produces a new draft of the ledger that they all agree on. The money never has to exist in a physical form because it’s all accounted for and can’t be moved without consensus.
This is basically how Bitcoin works, except that the participants are spread anonymously across a global network, and access to an account on the ledger is protected by public key cryptography. People who own Bitcoins use a Bitcoin client to manage their accounts. When they want to access their funds, they use the client to send an encrypted transaction request. Each active Bitcoin node then competes to validate the request and sign over the funds to the new owner.
This effort does not go unrewarded. By volunteering their computers to secure and facilitate Bitcoin transactions, users can earn new Bitcoins. These participants are called miners, and like their physical counterparts, the more time and energy they put into the Bitcoin network, the more they earn. The reward, however, gets smaller over time and will stagnate when the number of Bitcoins approaches 21 million, at which point a transaction fee will likely have already been phased in to replace the built-in incentives.
At the conference, the attendees stood up one by one to introduce themselves. A few identified themselves as miners. Then there were representatives from the online Bitcoin exchanges like Mt. Gox and Camp BX, which allow people to convert Bitcoins into traditional currencies and vice versa. There were also students in economic theory, programmers working on smartphone apps, general enthusiasts, a corporate lawyer, and one man who simply introduced himself as a “Bitcoin millionaire.”
Amateur economists mingled with the software programmers and hardware vendors, who are scrambling to shave off a slice of the nascent economy. At the tables surrounding them, representatives peddled their wares—nearly completed iPhone applications; cubes of metal that could be used to magnetically encode Bitcoin keys as a way to store them in an invisible, yet physical format; exclusive invitations to a Bitcoin bank. Those aspiring to create new Bitcoins could purchase a hulking mining system—an amped-up, liquid-cooled PC—for a few thousand dollars.
Most people there seemed to be either Bitcoin idealists or Bitcoin profiteers. Some of them were both. The true believers in the group form a kind of ideological brotherhood and they imagine a world where online vendors make direct financial contact with their customers. No need for credit cards, banks, PayPal, and their inevitable additional costs. No more turning over sensitive private information with every purchase—although account histories are public, account owners are quasi-anonymous. Many Bitcoin enthusiasts also dream of replacing the machinations of the Federal Reserve with an inherently predictable network, one that could never print new money.
But it will take more than enthusiasm to sell Bitcoin to the wider public. And the resources needed to build infrastructure around the Bitcoin network are most likely to come from those interested in making money from it. For now, at least, both the idealists and the profiteers have a shared priority—to simply keep the system running. Nearly every conversation at the conference centered on how best to do that.
In June, a hacker broke into Mt. Gox, the largest Bitcoin trading engine, stole an administrator account password, and ran off with thousands of Bitcoins (or the digital keys to access them). More suspicious losses soon followed at MyBitcoin (whose representatives were noticeably absent from the conference) and the Polish Bitcoin exchange, causing the price of the currency to plummet.
Security was the first topic addressed by Gavin Andresen, whom the Bitcoin community has unambiguously knighted as their lead programmer and ambassador to the public. Andresen made a clear distinction between online wallets and trading sites—which struggled to secure their systems after the media attention early this summer—and the Bitcoin client itself. “There have been no significant problems found,” he said. “As far as we can tell, core Bitcoin is secure.” Andresen reported that two security researchers, Dan Kaminsky and Jacob Appelbaum, looked over the Bitcoin client and gave it a clean bill of health. Scalability is another issue, and Andresen said he’s spending most of his time ensuring that Bitcoin will be able to handle its next growth spurt.
At night, the Bitcoiners took their new economy to the streets of New York City for a different kind of test. Bruce Wagner, the event organizer and host of a daily Bitcoin webcast, convinced a restaurant in the area to accept payments in Bitcoin, and the dinner was a chance for everyone to see how transactions could work in the physical world. After everyone had eaten, Wagner asked the members of the group to combine all their individual payments into a group payment. This was the owner’s first time using the system, and everyone there wanted to make it as easy as possible. When Bitcoin transactions get sent out to the network, it takes about 10 minutes for the system to confirm them, a feature that could make some vendors nervous. Yifu Guo, a data analyst at Con Edison who had previously organized a Bitcoin meet-up in New York City, offered to pay for the group with an immediate voucher that he could e-mail from his account with Mt. Gox to the owner of the restaurant. Then everyone else could reimburse him through an Android-based Bitcoin wallet. All the tips still had to be in cash.
The experiment worked, but it was clumsy.
At the time of the conference, one Bitcoin was selling for around $11, with a little more than 7 million coins in circulation and an average of 8000 nodes actively accepting 7000 Bitcoin transactions a day. It’s a fluffy, downy fledgling of an economy—a curiosity to outsiders—but very serious to those who can call themselves “millionaires” and have invested in its further success. This week, after months of slow, but steady decline, the exchange rate hovers around 2 dollars. The drop could be a part of a necessary readjustment from the artificially inflated prices of the summer. But some commentators argue that investors may be leaving the network after discovering that there are very few places to spend the Bitcoins that they own. If the community is to build a committed list of Bitcoin vendors, developers will have to step up with some very simple and intuitive solutions for paying them. A quick swipe. A few keystrokes. Anything more, and the elegance of the Bitcoin network becomes irrelevant. Plenty of people are working on it, and in a few months we’ll get a chance to see how far they’ve come. Wagner has already announced that there will be another Bitcoin conference in January and a third one next summer.
About the Author
Morgen E. Peck is a freelance writer based in New York City. In August 2011, she reported on the security vulnerabilities of medical devices.