Culture

The Rise, Fall, and Resurrection of Bitcoin, the World’s Most Enigmatic Currency

Culture

The Rise, Fall, and Resurrection of Bitcoin, the World’s Most Enigmatic Currency

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IT’S FRIDAY afternoon on a cold winter’s day in New York and the city is swathed in a blanket of gray felt clouds. Peter Sereti, co-owner of the midtown diner Hudson Eatery, sits at the bar of his restaurant bundled in a thick cardigan and sips a cappuccino. Born and raised in New York but of Greek heritage, Sereti has the Old World predilection of taking his time in conversation, circling the subject at hand before coming in for a landing.

In July 2011, Hudson Eatery became the second restaurant in Manhattan to accept bitcoin, the enigmatic online crypto-currency launched two years earlier. Bitcoin’s future had never burned as brightly as it did the summer Sereti decided to give it a chance. Media frenzy had driven the value of a bitcoin up from a few cents to nearly $30 in a matter of months—investors were raking in considerable fortunes. The decision to accept bitcoin at the Hudson Eatery seemed like a smart marketing ploy.

When Sereti broaches the subject of bitcoin, he does so listlessly. His memory of the currency is vague, and he recounts his experience in shrugs and drawn-out “ehs.” “I didn’t see anything from it,” he says, waving his hand as if shooing away a fly. Hudson Eatery dropped bitcoin only a few weeks after adopting it. Sereti seems soured on the whole concept of a digital currency. “I don’t want to sound negative, but I could come up with something tomorrow and call it Goldcoin,” he says. “I’d find the right people to create it and then we’d all have unlimited Goldcoins.”

Sereti isn’t the only one disenchanted by bitcoin; in fact, he’s part of a sizeable contingency of onetime believers who have left the electronic currency for dead. But in the last 12 months, something unexpected has happened: Under the radar and out of the headlines, bitcoin has risen like a zombie from its digital grave.

IN CONCEPT, bitcoin was born in November 2008, when someone named Satoshi Nakamoto posted a research paper detailing the design of a digital currency onto an obscure online forum for cryptography, the practice of creating and cracking codes. Bitcoin, Nakamoto outlined, would exist as a monetary system that could be bought, sold, or traded across the planet. Transferring a bitcoin would be as easy as sending an e-mail, with the added benefit of completely bypassing banks, credit card companies, PayPal, governments, and any other taxing and regulating institution. There would be no routing numbers, no bank account details, and no fees. All you would need was a username and a password. Bitcoin transactions would be entirely anonymous, allowing its users to purchase whatever they liked, whether or not it was legal. One could conceivably purchase a crate of explosives from Russia, wire a billion dollars to North Korea, or even buy a shipment of cocaine from a Mexican cartel, no questions asked, with a click of a button.

On January 3, 2009, Nakamoto created the first 50 bitcoins. A small but dedicated community emerged almost instantly. Meanwhile, Nakamoto’s identity had come under suspicion. There was no trace of a programmer named Satoshi Nakamoto before bitcoin came into existence. Even after the currency launched, Nakamoto’s Internet presence was sparse—he responded to inquiries capriciously at best. Rumors spread that Nakamoto wasn’t an individual, but rather an underground collective of cryptologists. The New Yorker would later send writer Joshua Davis on a mission to uncover Nakamoto’s identity. Davis came back with two possible candidates—a Finnish programmer and an Irish cryptologist—both of whom denied the accusation. To this day, Nakamoto’s true identity remains unknown.

Despite—or perhaps because of—the quasi-mythic story surrounding Nakamoto, bitcoin attracted attention. Though the dollar value of a bitcoin hovered at, or just above, zilch for the next year and a half, it entered public consciousness by way of society’s unsavory fringes. Thanks to its untraceable nature, bitcoin eventually became the de facto currency of Silk Road, a notorious drug retail website inaccessible to the average Internet user. While the relationship tainted bitcoin’s reputation, it also painted a seductive portrait: a currency traded in the dark alleys of the Internet for sex, narcotics, and guns. Bitcoin, in a sexy sci-fi way befitting a William Gibson novel, became the currency of vice. In fall 2010, one bitcoin traded for roughly 22 cents. By February 2011, one bitcoin traded for $1. Within four months, the value of a bitcoin would increase 30-fold.

On May 9, 2011, a Forbes article titled “Crypto Currency” catapulted bitcoin into the spotlight. Adrian Chen of Gawker picked up where Forbes left off and cemented the bitcoin–Silk Road connection in a June 1, 2011, blog post titled “The Underground Website Where You Can Buy Any Drug Imaginable.” To date, that article has been viewed over 1.4 million times. Writers from The Economist, Forbes, and The New York Times tried to make sense of a booming currency that had emerged from the Internet’s hinterlands. While techies heralded bitcoin as the dawning of a new era, financial analysts treaded warily. Rick Falkvinge, the founder of Sweden’s Pirate Party—a political organization founded on a platform of digital privacy advocacy—declared in an article titled “Why I’m Putting All My Savings Into Bitcoin” his intention to do just that. On June 9, 2011, the price of one bitcoin reached an all-time high of $29.55. The original 50 bitcoins that Nakamoto had created a year and a half prior were now worth nearly $1,500.

It was around that time, says Sereti of the Hudson Eatery, that an upstairs neighbor of the restaurant came down to speak with him. The neighbor told him that bitcoin was “the next big thing,” a smart way to draw attention to his fledgling restaurant. “He kept pressuring me and finally I said, Okay,” Sereti says while trying to recall the neighbor’s name. After some time he says the neighbor’s name was Bruce. Bruce Wagner is host of the online series The Bitcoin Show, in which he interviews leading voices of the bitcoin movement. In Wired magazine’s seminal article on the subject, “The Rise and Fall of Bitcoin,” author Benjamin Wallace refers to Wagner as “bitcoin’s chief proselytizer.” In a photograph accompanying the article, Wagner stands proudly in the open doorway of the Hudson Eatery. Whatever Bruce told Sereti, it made an impression. Not only did the Hudson Eatery become the second restaurant in New York to accept bitcoin (the first, a Mediterranean spot called Meze Grill, has since shuttered), but Sereti also invested $1,000 of his own money into the currency.

Then, in a flash, the bitcoin market imploded. In mid-June of that year, a major trader reported that half a million dollars worth of bitcoins had been stolen from his computer. A week later, Mt. Gox, the leading bitcoin exchange site that lets users trade their bitcoins for government-backed currencies like dollars, reported that it had been hacked. Although the thief only made off with roughly two thousand bitcoins, the synchronized failures blew a hole in investor confidence. The price of a bitcoin tumbled in a landslide—first to $17, then to $13. In late July, MyBitcoin, a digital deposit box for bitcoin users, went offline. A few days later it came back, and announced that half of the savings it had safeguarded (roughly $250,000) had disappeared. In August 2011, The Wall Street Journal’s “MarketWatch” dubbed bitcoin their “Stupid Investment of the Week.”

Sereti says he thought better of his investment almost immediately—he cashed out a mere two days after buying in. “I didn’t know how it worked,” he says. “I wanted cash, and that was it.” By the end of that summer, the Hudson Eatery had stopped accepting bitcoin. “It was confusing and the waiters hated it. It would take an hour to close out a table.” Although Wagner had enticed him with the possibility of bitcoin savvy customers, Sereti says, “No one ever used it.” He estimates that the restaurant processed 30 to 40 bitcoin transactions in the few weeks it accepted them. The vast majority of those purchases occurred during a bitcoin event that Wagner had organized at the restaurant. Even then, some of the attendees opted to pay their tabs in dollars. After the crash, “he disappeared,” Sereti says of Wagner. “He disappeared as a customer, too.

The same news outlets that eyed the arrival of bitcoin with suspicion in the spring of 2011 came back to feed on its carcass in the fall. Languishing under the dark cloud of negative press, a bitcoin sold for less than $2.50 by October. Gossip spread that Wagner had been involved in the MyBitcoin theft—that the heist had been an inside job. Wagner revealed that far from being behind the crime, he was one of its biggest victims, losing 25,000 bitcoins in a digital instant. The venerable oped columnist Paul Krugman used valuable NYTimes.com real estate to bid bitcoin adieu. In “Golden Cyberfetters,” he asked himself if the currency had been a successful experiment. “Um, no,” was his answer. In his Wired article, Wallace wrote, “The underlying vulnerabilities that led to bitcoin’s troubles—its dependence on unregulated, centralized exchanges and online wallets—persist.” The situation, he concluded, was largely hopeless. It was predicted that bitcoins would dissolve into the digital dust from whence they emerged—except that they didn’t.

ALTHOUGH THE price of bitcoins dropped, it eventually stabilized and, day-by-day, it began to rise again. Some speculators believed that bitcoin still had a future and bought back into the market while prices were still low. By March 2012, a bitcoin was worth $5, and by August, $12. By the fall, the future looked bright again. Then, on November 15, WordPress, a publishing platform that powers the websites of such heavyweights as The New York Times, CNN, Reuters, and eBay (not to mention BULLETT and 57.8 million other sites), declared that it would accept bitcoin as a payment method for hosting fees. Andy Skelton, the company’s spokesperson, explained the decision: “Unlike credit cards and PayPal, bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept bitcoin payments can do business with anyone.” The official WordPress blog elaborated: “PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control. Our goal is to enable people, not block them.”

On the heels of the WordPress decision came more good news for investors. In December of last year, the bitcoin exchange website Paymium announced that it had partnered with a French bank enabling bitcoin owners to stash their money in an institution protected by the French equivalent of the Federal Deposit Insurance Corporation. Meanwhile, the digital currency is being warmly welcomed to the world of online gambling. In January 2013, one casino announced that it had made a $500,000 profit on bitcoins in just six months. The encouraging news has kept prices on the rise ever since. At the writing of this article, bitcoins have surpassed their 2012 record. A single bitcoin now sells for over $34 and its value continues to rise.

Bitcoin’s success comes as no surprise to Rick Falkvinge, the Swedish pirate who invested all of his savings into the currency in May 2011, a month before it crashed. “I put all my savings and a ton of money I borrowed [into bitcoin],” he says. “It quadrupled in two weeks. Of course, that was just before the big crash. It took me two years to learn the basics of trading and fortunately I’m in the black now.”

Falkvinge, born Dick Augustsson, was a run-of-the-mill IT professional until January 1, 2006, when he founded the Swedish Piratpartiet, or Pirate Party. The party, which now has sister organizations in over 60 countries around the world, advocates for civil liberties, information privacy, government transparency, universal access to the Internet, and a radical reform or elimination of copyright and patent laws. It’s not hard to see why the Pirate Party views bitcoin as an ally.

A towhead with blue eyes and soft features, Falkvinge looks like the long-lost Swedish brother of The Office’s resident weirdo Dwight Schrute. While rummaging through his desk in search of an eye patch (which, as a member of the Pirate Party, he’s keen on wearing), Falkvinge considers whether or not bitcoin is part of a larger movement. “It definitely is,” he decides. “I mean, we’re talking about empowerment. Less than half a lifetime ago, the government was not allowed to see your private banking affairs. They were not allowed to see your income, they were not allowed to see your expenditures, and they were not allowed to see your wealth. Bitcoin is about returning to what I think is a more natural state of affairs, where government has a right to tax you, but they don’t have a right to go in and see everything you’re doing.”

But surely government will push back on a currency that’s entirely unregulated? “When you see the real heavyweights being threatened, as in Wall Street and national banks, then you’ll see attempts at legislation,” Falkvinge says. “The question at that point will be, ‘Are they too late?’ Will they be like the record labels shutting down Napster and thinking they had won?” His voice dropping to a more serious timber, Falkvinge continues: “We’re at a crossroads. You have the ability to collect, process, store, and analyze information at a volume greater than ever before in history, and it’s rising exponentially. Depending on who gets control of that ability, we could have two very different societies. If your government conducts its business behind closed doors while demanding the transparency of every citizen, you’ll have a society that goes way, way beyond the most dystopic visions from the 1950s. On the other hand, if citizens take control of this technology and refuse to let themselves be regulated, then we’ll have a world of accountability never before seen, where leaders are actually held accountable to their actions.”

Professor Ajay Vinze, a Fulbright Senior Specialist at the W.P. Carey School of Business at Arizona State University who’s been researching bitcoin and other virtual currencies, is equally confident in the transition to a digital currency. “With the increased role of technology in our collective mindset, people are more willing to look at this as an alternate option,” says Vinze of the viability of a digital currency in a globalized economy.

But will that currency be bitcoin? “I’m not sure, but it has certainly instigated that process. In marketing literature, they always talk about the first-mover advantage,” Vinze says. “But with technology, there’s sometimes a first-mover disadvantage. There are sometimes not  enough people to buy into a new technology. The person who innovates, or the institution that tries to institutionalize the change, doesn’t necessarily get to reap the full benefits.” One needs look no further than WebCrawler, the first mainstream search engine, or Friendster, Facebook’s social networking predecessor, for signs of a first-mover disadvantage. Nonetheless, Vinze says, bitcoin stands out. “I don’t see many other options. But have we hit that tipping point yet? Probably not. Are we headed toward that tipping point? Yes. I think that in five to ten years there will be a significant presence.”

Back at Hudson Eatery, there’s a more immediate reality: It’s now after 5 p.m. and the Friday happy hour crowd from the CBS studio across the street is trickling in. It’s easy to understand where Sereti and the millions of others who either dismiss or ignore bitcoin are coming from. Whether bitcoin fundamentally reinvents our relationship with money or vanishes into the ether is impossible to predict. In the meantime, for the public at large, the digital currency remains intangible—a vague and amorphous concept still largely associated with the Internet’s more sinister elements. But so were online stores and auction houses when they first emerged. In fact, it’s not hard to recall the trepidation you felt the first time you bought something on eBay—and that was less than 10 years ago. In an era in which Cyber Monday is quickly eclipsing Black Friday, that attitude rings prudish and outdated. Innovations like Facebook, Amazon, and bitcoin are tricky that way: They seem improbable until one day you look back and realize they were inevitable; that try as you might, you can no longer imagine life without them.

 

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