Contents

Author’s Note xxi

Prologue xxiii
1. What is Bitcoin? How is it Made? .................................................. 1
2. The Anarchic Computing Subculture in which Bitcoin has
its Roots ............................................................................................ 29
3. The Rise of Bitcoin and the Disappearance of its Maker ... 39
4. Nerds, Squats and Millionaires ................................................... 55
5. How a Computer Nerd became the FBI’s Most Wanted
Drug Dealer .................................................................................... 69
6. Who is Satoshi Nakamoto? ......................................................... 85
7. Why Bitcoin is the Enemy of the State .................................. 149
8. How Bitcoin will Change the World ....................................... 163
9. A Billion-Dollar Hedge Fund Manager and a Super-Smart
Mathematician Forecast the Future ........................................ 177
10. Should You Buy In? ...................................................................... 195
11. The People’s Money ................................................................... 207

Appendix I: A Beginner’s Guide to Buying Bitcoins 213

Appendix II: Who Is Satoshi? The Usual Suspects 217
Acknowledgements 223
Bibliography 227
Notes 235
Subscribers 259
A Note About the Typeface 269
 AUTHOR’S NOTE

I have called this book Bitcoin: The Future of Money? Really, I

should have called it Cryptocurrency: The Future of Money?
Bitcoin is just one of many cryptocurrencies (don’t worry,
I’ll explain what that means). It is, arguably, not even the drst.
But it is the drst that works. And it is the one that has caught
everyone’s attention. Rather as people say ‘Scotch tape’ or
‘Sellotape’ instead of ‘sticky-back plastic’, Bitcoin is the name
everybody knows – hence my choice of title.
I have quoted extensively from online forums and chat
boards. These often contain spelling mistakes and grammat-
ical errors. For the sake of accuracy, I have made the decision
to leave these errors uncorrected. Nor have I acknowledged
errors with a ‘sic’, as I felt this would be both patronizing to
those I quote and burdensome on the reader. So, when you
come across errors in quoted passages, now you know why.
In researching this book, I have come across entire polit-
ical and technological movements I’d never even heard of,
dlled with characters I knew even less about. They might be
infamous to a small band of computer coders, but not to
most people. What’s more, those who discuss Bitcoin and its
associated technology quickly slip into technical jargon, par-
ticularly regarding computer code. It can make it all rather
bafeing and, worse still, alienating. If you think dnance and

xxi
 Bitcoin

economics are hard to write about in a clear way, try com-

puter code with an all-star cast whose names mean absolutely
nothing to most people.
I’ve tried to make it all as clear and concise as possible – to
tell this amazing story in such a way that you don’t have to be
a 25-year-old computer hacker to understand it – but nor will
you be bored if you are one. To get the balance right, I have
had it read, at one end of the scale, by numerous computer
programmers and, at the other, by my 82-year-old, technolog-
ically illiterate dad.
I hope you enjoy it.

xxii
 PROLOGUE

We have not only saved the world, er, saved the banks…
— Gordon Brown, former UK Prime Minister

In September 2008, crisis gripped the world.

Many believed the entire dnancial system was about to
collapse. It was a ‘global dnancial tsunami’; we were ‘on the
brink’ and ‘staring into the abyss’.1 Capitulating stock mar-
kets, bankruptcies, bank runs – events came thick and fast
and, at drst, nobody seemed to know quite what to do.
Then, under immense pressure from the world of dnance,
governments and central banks reacted dramatically. They
created money and credit on a scale unprecedented in
human history. Banks were bailed out, interest rates were
slashed to levels never seen before and the process of cre-
ating money electronically known as quantitative easing was
begun.
The result?
The dnancial system was saved. Central bankers were
hailed as heroes. The idea spread that governments and cen-
tral banks really can operate an economy. Even those who
would normally oppose such interventions seemed to think
the right thing had been done.
A few dissenters argued that the few were being bailed

xxiii
 Bitcoin

out at the expense of the many, that enormous problems in

the dnancial system were simply being deferred when they
needed to be faced, and that these problems would only
come back on a far greater scale. At the heart of the problem
is money itself, they said. The way money is created means
that banks and governments have inordinate control over
our dnancial system. They prodt hugely by it, while every-
body else loses. The system actually creates inequality.
But such dissent was ignored – if, indeed, it was even
heard.
‘Only a crisis, real or perceived, produces real change’,
said economist Milton Friedman. Here was that opportunity
for real change – an opportunity to reform our systems of
money, banking and dnance – our entire economies even.
Politicians chose not to take it, preferring instead to save a
broken system.
But that badly needed change was taking place – secretly,
in a remote corner of the internet, far away from the sound
and fury of this great dnancial crisis.
On August 18th 2008, a domain name is registered –
bitcoin.org.
Even today, nobody knows who registered it.
Two weeks later, one Satoshi Nakamoto publishes a nine-
page white paper outlining a design for ‘Bitcoin: A Peer-To-
Peer Electronic Cash System’.2 Nobody takes any notice.
Two months pass. On November 1st 2008, with the stock
market now in full-on crash mode, Satoshi mentions his
paper on a mailing list for people with an interest in cryptog-
raphy.
‘I’ve been working on a new electronic cash system that’s
fully peer-to-peer, with no trusted third party’,3 he says.

xxiv
 DOMINIC FRISBY

Readers throw him various technical questions, which he

answers. Nobody seems persuaded. It does not ‘scale to the
required size’, says one. The code ‘can’t work on today’s
internet’, says another. Governments will close it down if it
takes oc, says a third.
‘I believe I’ve worked through all those little details over
the last year and a half while coding it, and there were a lot
of them’, says Satoshi. ‘I appreciate your questions. I actually
did this kind of backwards. I had to write all the code before
I could convince myself that I could solve every problem’.4
A week later the Bitcoin project is registered at Source-
forge, a website ‘dedicated to making open source projects
successful’.5
On Saturday January 3rd 2009, the day UK Chancellor
Alistair Darling announces his second bailout of the banks,
the drst 50 bitcoins are created – or, to use the correct ter-
minology, ‘mined’. A few days later, Satoshi returns to the
mailing list and says, ‘Announcing the drst release of Bitcoin,
a new electronic cash system.’
What had been born was a new form of money – money
that could change the world.

xxv
 1

WHAT IS BITCOIN? HOW

IS IT MADE?

Cash is king.
— Stock market saying

It was probably the greatest trade in all of recorded history.

In October 2009, a Bitcoin adcionado who went by the
name of ‘Liberty Standard’ published the drst bitcoin
exchange rate. He arrived at the dgure by dividing the cost
of the electricity consumed by his computer over a 30-day
period by the number of bitcoins it generated. 1,309 bitcoins
to one dollar was the price.6 Liberty Standard was actually
criticized for valuing bitcoins too high.
Four years later, on November 29th 2013, one bitcoin was
$1,242 – over 1.6 million times higher. A bitcoin was the same
price as an ounce of gold.
If anybody managed to buy the low (which actually came
in December 2009 at 1,630 bitcoins to the dollar) and sell the
high, they made over two million times their money. In four
years, one dollar became two million dollars.
Nice work if you can get it.

1
 Bitcoin

The story of Bitcoin is amazing – not just for the gains

(and the losses) that have been made, not just because of the
revolutionary technology, but also because of the human sto-
ries that have come about as a result.
There’s the developer in Finland who, trying out the tech,
bought a beer from his buddy for some bitcoins. Three years
later, his buddy sold those coins and bought a des res apart-
ment in the trendiest district in Helsinki. There’s the com-
puter nerd with an interest in economics who became the
FBI’s most wanted drug dealer. And, of course, there’s the
great whodunit.
Who invented Bitcoin? Who is Satoshi Nakamoto?
He has a Japanese name, a German email address and he
uses British spelling. He has invented a new form of money
that could change the world. He is worth almost a billion dol-
lars. He has computer programmers the world over purring
at the unhackable genius of his tech. Half the internet – as
well as investigative journalists and forensic scientists, even
– have been trying to dgure out his identity for over three
years. And yet still, nobody knows who he is.
I think I’ve cracked that, by the way.
The story of Bitcoin has everything from the hilarious to
the mysterious to the audacious to the calamitous.
Genius computer hackers. Dogs with funny names.
Cypherpunks. Cryptography. Financial systems. Govern-
ments. Organized crime. Attempted murder. Political insur-
rection. Inspiring bursts of generosity. Squatters. Poker
players. City traders. And people just like you.

2
 DOMINIC FRISBY

How Bitcoin could change everything

Everybody is constantly thinking about ways to make
money.
The average American spends more hours of each day
attempting to earn it than he does anything else7 – be that
eating, playing or even sleeping.
But hardly a soul – not even highbrow economists – stops
to consider what money actually is and how it works.
It is hard to overstate how important money is. Like the
air we breathe, it is part of almost everything we do. Just
about every transaction we make involves money. To use
another analogy, what blood is to a body, money is to an
economy.
Governments, central banks and private banks create
modern money – dollars, pounds, euros and so on. This
ability to create money is – as I’m sure you appreciate – an
immensely powerful privilege. While most have treated this
privilege responsibly most of the time, there are plenty that
haven’t. And all sorts of abuses have crept in.
Politicians are forever spending more money than they
have – aka running up dedcits – in pursuit of some ideology
or political agenda (normally popularity and re-election).
They might spend the money on bailing out banks, on wel-
fare, on some kind of subsidy; they might even spend it on
wars (the US military is the world’s biggest employer). Cen-
tral banks manipulate interest rates and ineation numbers
on behalf of politicians and special interest groups. Private
banks, through such means as lending and leverage, perpe-
trate their own abuses in pursuit of prodt. As a result of all
this, money gets debased.

3
 Bitcoin

Government agencies even use money as a means to con-

trol people and spy on them.
Money is supposed to be a means of exchange and a store
of wealth, but it is also a political tool. This has been the
case throughout history, but the control of governments and
banks has grown over the last hundred years and is now
unprecedented. It has led to huge concentrations of wealth
and power. Both the state and dnance now occupy, in the
eyes of many, disproportionate territory in our economies.
Meanwhile, over half the world’s population still doesn’t
have access to basic dnancial services and is shut out.
Suddenly, along comes Bitcoin, an open-source currency
with no central authority, ocering an alternative that could
undermine the existing monetary order. Nobody even knows
who designed it. It’s by no means the drst attempt at digital
cash, but it’s the drst that works this well. It’s actually more
efcient than dollars or pounds. It’s immune to all the manip-
ulation and abuses that go on, there are no barriers to entry,
bar internet access, and it has captured a zeitgeist in a way
that nobody could have foreseen.
If Bitcoin changes the way we transact and the way we
store wealth – and it has the potential to do this – the reper-
cussions could be enormous. Think what email did to the
postal service, or what the internet did to newspapers, pub-
lishing, music and television. With the huge costs involved
in the printing and distribution of physical newspapers,
news publishing was once the exclusive domain of a few
large companies. Now any blogger, aspiring journalist or
start-up can publish on the web, ecectively for free. Huge
opportunities have opened up to the masses, and the old
dinosaurs have seen their monopolies eroded.

4
 DOMINIC FRISBY

We’re still a long way from that, but Bitcoin could do

something similar to banking, dnance and, even, the large
state model under which we live. Without wishing to get too
excited, it could bring about the huge changes to society so
many are clamouring for, re-balancing the skewed distribu-
tion of wealth and opportunity. The implications are enor-
mous.
That’s why Bitcoin is important.

What is Bitcoin?
When you type a website address into a browser you might
have noticed that the letters ‘http’ appear at the front. ‘Http’
stands for Hypertext Transfer Protocol. In typing an address
you are actually sending an HTTP command to transmit that
website to you. Hypertext Transfer Protocol is the means by
which information is shared across the web.
Similarly, when setting up an email account, you might
have noticed the letters ‘smtp’ – for example,
‘smtp.gmail.com’. SMTP stands for Simple Mail Transfer
Protocol. SMTP is the protocol by which we send emails to
each other. What actually happens when you send an email
through Gmail to, say, someone with a Yahoo address is that
a Google server reaches out to a Yahoo server and transmits
a text dle; then the Yahoo server says to its user, ‘you’ve got
mail’.
So, a protocol is an agreed system by which information
is shared across a network.
Bitcoin – with a capital ‘B’ – is another protocol. The
function of the protocol is to send and receive payment
information.

5
 Bitcoin

With Bitcoin, your computer reaches out to another

user’s computer, gives it some binary gibberish proving you
control X number of coins at this address and want them to
increase the balance at that address.
The unit of money on the Bitcoin protocol is the ‘bitcoin’
(with a small ‘b’). As the dollar is the unit of money on the
US banking network, so bitcoin is the unit of money on the
Bitcoin system.
So, Bitcoin is two things – a protocol and a unit of money.

How do you get bitcoins?

Using dollars or pounds is easy.
You get paid in them. They’re in your bank account
(hopefully). And you can pay for things with them via elec-
tronic banking, by cheque, credit card, or in cash.
But where on earth do you get bitcoins?
There are three ways.
You can get paid in bitcoins. You can buy bitcoins. And
last of all (the very unconventional bit), you can make bit-
coins. Yes, you can, literally, create money.
You earn bitcoins by doing or selling something in
exchange for bitcoins – just as you would earn normal
money. If I do this job for you, you pay me in bitcoins.
You buy bitcoins just as you would buy and sell foreign
currency – from the Bitcoin equivalent of a bureau de change,
known as a Bitcoin exchange, or directly from an individual.
You hand over your dollars, pounds or whatever currency
you’re using and you receive bitcoins.
To create bitcoins, you run the Bitcoin software on your
computer. It’s called ‘mining’ – more on that later. But I

6
 DOMINIC FRISBY

should say that mining has now progressed to the point at

which regular home computers are no longer much good.
Of course, you need somewhere to keep your money. You
could keep your dollars in a bank account, your back pocket,
your wallet or purse, even under your mattress. Bitcoins are
kept in a ‘digital wallet’.
There are hundreds of places to get a wallet, just as there
are hundreds of places to get an email account. Often people
will have more than one. You can keep a wallet on your com-
puter or your phone, you could keep one on a hard drive oc-
line, or you could keep one with an exchange. Some people
with lots of bitcoins keep them in a wallet on a hard drive in
a safe.
Each wallet has its own address – a sequence of dicerent
numbers and letters. To make a payment, you click on your
wallet, type in the number of coins you wish to pay, copy and
paste the payee’s wallet address, hit send and the payment is
made. To receive a payment in bitcoins, all the person paying
needs is your wallet address. When you receive a payment,
your computer might give you a little ‘ching’ sound to notify
you. It is as simple as sending an email.
With barcodes you can open your wallet on your smart-
phone, photograph the barcode, hit send and the payment is
made. The day is not far oc when you will walk into a shop,
select an item you wish to buy, photograph the code on the
label, payment will be made automatically and oc you go.
Once you get the hang of it, it is as simple as using a credit
card. And, as long as you have internet access, there are no
barriers to entry.