Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires trying to reinvent money.

Key Takeaway:

This technology is going to change everything or nothing

The holdings of every user would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain. The design supports a tremendous variety of possible transaction types — escrow transactions, bonded contracts, third party arbitration, multi-party signature etc.

Events that helped bring momentum to bitcoin adoption:

  1. After Julian Assange leaked a vast trove of confidential American diplomatic documents in WikiLeaks, the large credit card companies and PayPal came under immediate political pressure to cut off donations to WikiLeaks. This move pointed to the potentially troubling nexus between the financial industry and the government. Bitcoin, in turn, seemed to have the potential to counteract the problem because each person on the network controlled his or her coins with his or her private key. There is no central organization that could freeze a person’s bitcoin’s address or stop coins from being sent from a particular address.
  2. Silkroad (site is shutdown now) accepting bitcoins
  3. The financial crisis sweeping Europe added yet another boost to the price of bitcoin. The banks on the Mediterranean island of Cyprus were on the verge of collapsing when European authorities put together a bailout plan. The hitch was that all savings in Cyprus banks were to be docked by 10%. The government in other words was confiscating money from private bank accounts. Russians who kept their money in Cyprus’s banks were rumored to be buying up bitcoin, which no government could confiscate.

Trust is bitcoin’s biggest barrier to success. At that point, the primary cause for distrust was not the lack of information about Satoshi Nakamoto. Satoshi’s anonymity, if anything, seemed to increase the level of faith in the system. The anonymity suggested that bitcoin was not created by a person seeking personal fame or success. What’s more, Satoshi’s absence allowed people to project their own vision onto bitcoin.


  1. Bitcoin could be easily and quickly transferred anywhere in the world, while still having the qualities of divisibility and verifiability that had made gold such a successful currency for so many years.
  2. Quicker clearance of transactions — The Automated Clearing House of ACH, which facilitated payments between bank accounts, was created in the 1970s and had not changed much since; this helped explain why bank transfers took at least a day to go through. For most Americans, the easiest and fastest way to send money to a friend or family member was still the old fashioned paper check. This problem was not just in the US. The Canadian government announced the launch of a digital currency effort, called Mint Chip, that it hoped would spur innovation in payments.
  3. Lower transaction costs: In Argentina, dollars had to be purchased through shady money changers, and were saved in closets or under the mattress. The promise of virtual currency that could be bought and stored online, accessed from anywhere, and secured with a private key looked like a significant improvement. Credit card transactions with foreigner, like the sale of conference tickets to Americans, normally took a long and expensive route before paying out in Argentina. The American customer’s credit card company would deduct around $2.50 from the $100 ticket price to send the money to Diego’s Argentinian bank. From there, Argentinian bank would generally charge another 3% for the foreign exchange, leaving $94.50. The big hit, though, happened when the Argentinian bank turned the dollars into pesos. If Diego, converted the $94.50 with a money changer on the street he could have gotten the unofficial rate of around 9.7 pesos for each dollar, leaving him with 915 pesos. But the bank exchanged the money at the official exchange rate set by the government — 6.3 pesos at the time of the conference — giving him, instead, 595 pesos. On top of that, Diego’s bank wouldn’t give him those pesos until 20 days after the customer purchased the ticket. The Argentinian bitcoin startup, BitPagos, provided a clever way around this expensive morass. BitPagos took the $100 credit card payment in the US and charged a 5% fee. But instead of transferring the remaining $95 to an Argentinian bank, BitPagos used the dollars to buy bitcoins in the US. BitPagos then transferred the bitcoins directly to Diego. He could either keep the bitcoins or exchange them for pesos at the unofficial exchange rate, thus ending up with around 920 pesos, instead of 595. And rather than taking twenty days, BitPagos gave him bitcoins in 2 days. Blockchain technology could make it easier for poor immigrants to transfer money back home and allow people with no access to a bank account or credit card to take part in the internet economy. Pay CoinBase 1% instead of 2.5% to the credit card companies. No more dealing with chargebacks from customers who received shipments and then disputed the charges, no more worrying about holding lots of sensitive financial information for customers. Merchants could accept bitcoin, and BitPay would immediately convert the virtual currency into dollars and deliver those dollars into the merchant’s bank account. This was attractive to merchants because BitPay charged around 1% for its service while credit card networks generally charged between 2–3% per transaction. Whereas credit card companies could recall money from a merchant in the case of a customer dispute, bitcoin transactions were irreversible.
  4. A commonly verifiable ledger (Debt: First 5000 years — The book by anthropologist David Graeber, argued that historians and economists have wrongly assumed that money grew out of barter. In fact, Graeber argues, and Wences Caracas came to believe, barter was never common and money was actually an evolution of credit — a way of tracking what people owed to each other. People used to keep a mental tally of what they owed each other, but money provided a way to expand the system more broadly among people who didn’t know each other. Bitcoin’s lack of any apparent intrinsic value didn’t matter when looked at against the history of money. The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was good as money. As it was used as money because it did what all good money did — It served as a sort of physical ledger on which society can keep track of who was owed what. Each piece of gold represented a slot on the ledger of all outstanding gold, which anyone could verify by checking the mass and volume of the gold. Bitcoin, Wences came to believe, was a purer version of that sort of ledger — a commonly verifiable place where everyone could keep track of who owned what.)
  5. Privacy of financial transaction — The potential advantage of bitcoin over the existing system were underscored when it was revealed that the hackers had breached the payment systems of the retail giant Target and made off with the credit card information of some 70 million Americans, from every bank and credit card issuer in the country. If the customers had been using bitcoin, they could have sent along their payments without giving Target any personal information at all. During this period, it was notable that some of the most encouragingly positive statements about virtual currencies came out of branches of the Federal Reserve. Fed officials didn’t love the idea of a currency outside the control of governments, but they were eager to see methods of moving money that cut out middlemen, who introduced risk into each transaction and into the financial system. The Fed had, in fact, been making increasingly vocal calls for technology that would allow more direct methods of moving money. During late 2013 and early 2014, a number of branches of Federal Reserve put out papers discussing the potential for the blockchain technology to eliminate risk in the financial system, if this technology could be harnessed properly.


  1. No chargebacks — this is an issue for the customer
  2. Hard Fork — a term coined to describe a situation where one group of computers on the network went off in one direction, agreeing about which node had mined each block, while another group of computers on the network moved in another direction, agreeing on a different set of winners for each block. This was disastrous because it meant that there was disagreement about who owned which bitcoins. So far, there had been a split only on the last few blocks — not the whole blockchain history — but if it wasn’t fixed, there would be essentially be two conflicting bitcoin networks, which would be likely to result in no one trusting either of them or bitcoin itself.
  3. The design meant that if a person lost the private keys for a particular address and had no backup, there was nothing anyone could do to access the coins being held by that address. Someone who had a private key for a person’s bitcoin addresses could, essentially, impersonate that person.
Solution — With a CoinBase wallet, if the customer lost the password, it was like losing the password to a normal website — the company could recover it. CoinBase customers didn’t have to download the somewhat complicated bitcoin software and the whole blockchain, with its history of all bitcoin transactions. This helped turn CoinBase into the go-to company for Americans looking to acquire bitcoins and helped expand the audience for the technology.
Solution — is an online wallet that, like other wallets, offered a way to access bitcoins from any computer or smartphone without downloading the entire blockchain. But this wallet was different in a crucial way. Rather than holding its customer’s bitcoins, kept only a small file for each customer with the private keys of that customer, encrypted in a way that made it impossible for the company to see the keys themselves. Because held an encrypted file with the keys, they were not on the computer of the user, vulnerable to hackers. But when a customer logged into wallet, the login process decrypted the file so that the keys were temporarily on the customer’s computer and could be used to access coins that the customer had on the blockchain. The customer’s data — how much money he or she had and the transaction history — was viewable through’s online template. But the company itself never saw the data. Because did not hold money or transaction history of its customers, it couldn’t be subpoenaed to give up customer records. Nor could the company steal its customer coins.

4. Money laundering — a terrorist could potentially put dollars into CoinBase wallet, buy bitcoins, and then use the blockchain to send those bitcoins to terrorist cells overseas. Because there is no identifying information attached to bitcoin addresses, the terrorist cell could receive money without anyone noticing. That is very different from a traditional bank, in which every account is tied to a specific person or organization

5. Economists who had taken note of bitcoin also pointed out that the virtual currency actually built in incentives discouraging people from using it. The cap on the number of bitcoins that could ever be created — 21 million — meant that the currency was expected to become more valuable over time. This situation, which is known as deflation, encouraged people to hold on to their bitcoins rather than spend them

6. There were growing number of examples of bitcoin being used by criminals to demand and accept ransom, which was much easier with bitcoin than with traditional means of payment. When criminals accepted cash for ransom they had to physically collect the money at some point, which provided some indication of their location. If ransom was sent digitally via PayPal, it didn’t require a physical handoff, but the payment could later be reversed. With bitcoin, criminals could demand that a victim send money remotely, and once it was sent, there was no reversing it.


  1. Bill Gates — Wences Caracas spotted Bill Gates at a conference, who had been notably reticent about Bitcoin. Wences knew that Gates’s multibillion dollar foundation has been making a big push to get people in the developing world connected financially and Wences approached him to explain why bitcoin might help his cause. As soon as Wences broached the topic, Gates’s face clouded over, and there was a note of anger in his voice as he told Wences that the foundation would never use an anonymous money to further it cause. Wences was somewhat taken aback, but this was not the first time he had been challenged by a powerful person. He quickly said that bitcoin could indeed be used anonymously but so could cash. And bitcoin services could easily be setup so that users were not anonymous. He then spoke directly to the work that Gates was doing, and noted that the foundation had been pushing people in poor countries into expensive digital services that came with lots of fees each time they were used. The famous M-Pesa systems allowed Kenyans to hold and spend money on their cell phones, but charged a fee each time. “You are spending billions to make poor people poorer”, Wences said. Gates didn’t just roll over. He vigorously defended the work his foundation had already done, but Gates was less hostile than he had been a few moments earlier, and seemed to evince a certain respect for Wences’s chutzpah. But Wences had another point he wanted to make. He knew that back in the early days of the internet, gates had initially bet against open internet and built a closed network for Microsoft that was similar to CompuServe and Prodigy — it linked computers to a central server, with news and other information, but not to a broader internet, as the TCP/IP protocol allowed. “To me it feels like you are trying to get the whole world connected with something like CompuServe when everyone already has access to TCP/IP”, he said, and then paused anxiously to see what kind of response he would get. What he heard back from Gates was more than he could have reasonably hoped for. “You know what? I told the foundation not to touch bitcoin and that may have been a mistake,” Gates said, amicably. “We are going to call you”. After Wences got back to California, he received an email from the Gates Foundation, looking to set up a time to talk. Not long after that, Gates made his first public comments praising at least some of the concepts behind bitcoin, if not anonymity.
  2. Ben Bernanke — was positive and praised bitcoin — “long term promise, particularly if the innovations promote a faster, more secure and more efficient payment system”
  3. Marc Andreesen — Andreesen Horowitz had closed a $1.5B fund and the partners said privately that they wanted to spend as much as $200M of that on bitcoin and blockchain startups, if they could find deserving ones
  4. Jamie Dimon — had told CNBC that he was extremely skeptical that Bitcoin would ever amount to anything real. Dimon said that once bitcoin companies had to follow the same rules as banks, when it comes to money laundering and compliance that will probably be the end of them. Dimon’s perspective was representative of a broader shift in the banking industry’s mindset since the financial crisis. Before the mortgage meltdown had nearly brought down the american economy, wall street hired some of the best young minds in the world and tasked them with finding innovative ways to make money. When many of those clever innovations ended up contributing to the economic collapse, the banks survived were made keenly aware of how financial experimentation could go awry. Whats more, regulators put in place a raft of new rules that forced banks to think twice before taking unnecessary risks. Just as important, government officials were forcing banks to pay billions of dollars in fines for past infractions. Few banks paid as high a monetary price as JP Morgan. The most important characteristic of any new business for JP Morgan was not how much money it would make, but how it would sit with regulators. JPMorgan had gone further than most in pulling back from potentially risky activity. During 2013, it had stopped working with remittance companies, check cashers, and even student loan providers, not because it had to, but because it didn’t want the headache.
  5. Tor software allowed people to obscure their location and identity when surfing the web. It also allowed websites to be set up behind a similar curtain of anonymity. Tor has been created by the US Naval Intelligence
  6. BitCoinJ — a codebase that made it possible to work bitcoin into websites. This was a significant step for the virtual currency. Before this, everyone who wanted to use the system had to download the Bitcoin software and a copy of the entire blockchain. That was, by now, a large file, and its size made it all but impossible to use Bitcoin on a phone or anywhere other than a home computer. Mike Hearn’s BitCoinJ was making it possible for people to use BitCoin without actively participating in the network, something that would open it up to new audiences with less technical expertise.
  7. Bitcoin has succeeded in its goal of giving its users control over their money, without requiring a bank or any middleman to conduct transactions. But all the money that had piled up in Mt Gox and MyBitCoin suggested that even among the small group who had chosen to buy bitcoin, many people were not actually interested in having total control over their own money. Even the firmest advocates for bitcoin’s self-empowering potential, like Roger Ver, were entrusting coins to Mt Gox and MyBitCoin, rather than holding the coins in their own addresses. And they were paying the price in lost and stolen coins. This raised questions about whether people really wanted, or were capable of taking advantage of, the decentralization that bitcoin was offering. People may have trusted the code underlying bitcoin, but they didn’t necessarily trust themselves to deal with that code in the right way and so they turned to outside experts to secure their money and make it easily available. Meanwhile, the services that had become so popular in the bitcoin community helped explain why governments and centralized authorities, like regulators, were often granted power in the real world. When people entrust money to financial institutions, they generally don’t have the expertise or time to make sure the institution is doing its job. In most cases, it is much more efficient for people to band together and pool resources to ensure that their banks and exchanges are on the straight and narrow. Thus were created government agencies like the Federal Deposit Insurance Corporation, which backs up American bank accounts against losses, and checks to make sure that banks aren’t putting deposits in danger.
  8. The primary tool that brought accountability to the anonymous market, SilkRoad was the same sort of feedback mechanism used by eBay and Amazon — customer reviews!
  9. Anon coin, Dark coin — crypto currencies
  10. Would bitcoin replace existing credit card systems? — credit cards seemed to work pretty well in Hoffman’s estimation. Despite the security risks and costs to merchants, he didn’t see too many users complaining about the credit cards failing them. If that wouldn’t get people using this new kind of network, Hoffman wondered, what would? Hoffman finally got a satisfying answer from Wences and David Marcus and few other Valley power players. Wences agreed with Hoffman that Bitcoin was unlikely to catch on as a payment method anytime soon. But for now, Wences believed that Bitcoin would first gain popularity as a globally available asset, similar to gold. Like gold, which was also not used in everyday transactions, bitcoin’s value was a digital asset where people could store wealth.
  11. While Wall Street research reports were talking about the possibility of a new payment system, the best minds in the Valley were thinking in much more ambitious terms after looking deeply at the code underlying bitcoin.
  12. Years earlier, Bitcoin had promised that it would spread its benefits to all its users, but by 2014 large chunks of the bitcoin economy were owned by a few people who had been wealthy enough before bitcoin came along to invest in this new system. Most of the new coins being released each day were collected by a few large mining syndicates. If this was the new world, it didn’t seem all that different from the old one — atleast not yet
  13. On average, there were only about four hundred transactions getting confirmed every ten minutes in mid-2014. If bitcoin wanted to compete with payment networks like Visa, which processed two thousand transactions each second, the software was going to need to change significantly
  14. Users — from a people on the first day back in Jan 2009 to 6 million users in 2014

Chip technology for mining bitcoins:

Application Specific Integrated Chip (ASIC) is a chip that is built to specifically accomplish just one task — an even more specialized computing unit than a GPU (Graphical Processing Unit). If someone could build an ASIC designed specifically to solve the bitcoin hash function, it would probably be able to crunch the numbers hundreds of times faster than a GPU and thus likely to win hundreds of times more bitcoins

  1. The data centers running 21e6 machines were now the single biggest source of mining power in the US
  2. Val Nebesny designed several generations of ASIC chips. Bitfury is so good that it soon threatened to represent more than 50% of the total mining power in the world.

Interesting companies in this space:










Personalities who have influenced this space:

Satoshi Nakamoto, Erik Voorhes, Martti Malmi, Laszlo Hanecz, Gavin Andresen, Jeff Garzik, Roger Ver, Charlie Lee

Mike Hearn (BitCoinJ)

Jed McCaleb (founder of Mt Gox and Ripple)

Mark Karpeles (founder of Mt Gox)

Dan Morehead (Pantera Capital)

Charlie Shrem (founder of BitInstant — currently serving a 2 year sentence)

Barry Silbert

Wences Casares (Founder of Xapo)

David Marcus (Facebook, ex-PayPal)

Winklevoss twins

Chris Dixon

Fred Wilson

Peter Thiel (Founders fund, ex-PayPal)

Balaji Srinivasan (a16z)

Pete Briger (Fortress)

Reid Hoffman (invested in Xapo)

Marc Andreessen

Jamie Dimon

Val Nebesny (founder of Bitfury)