Many people have lost some data while reformatting a computer hard drive. Jered Kenna lost more than that. In 2010 he erased from his computer 800 Bitcoins that have been worth more than $200,000. Kenna isn’t upset: He has plenty more. He says he bought his first batch of virtual currency, 5,000 coins, at 20¢ each. On April 10, Bitcoins traded for as much as $258 each, according to Tradehill, a Bitcoin exchange in San Francisco, before plunging more than $100. Like other enthusiasts, Kenna shrugs off the volatility. While he won’t disclose his total holdings, he says, “I’m happy to be considered a member of the Bitcoin millionaires’ club.”
Created four years ago by a person or group using the name Satoshi Nakamoto, Bitcoin is a virtual currency that can be used to buy and sell a broad range of items—from cupcakes to electronics to illegal narcotics. The surge in a Bitcoin’s value has made millionaires out of people who loaded up on them early on—however briefly. Many of them are self-described libertarians, drawn by the idea of a currency that exists outside the control of governments. Some were so taken with the concept that they launched Bitcoin businesses, such as exchanges where people can buy the coins or exchange them for dollars. There are also investors, notable among them, former Facebook litigants the Winklevoss twins, who have amassed around $11 million in Bitcoin, according to the New York Times.
Illustration by Dorothy Gambrell
Bitcoins are “mined” by computers that solve difficult cryptographic problems to verify transactions. As more Bitcoins are created, the problems become more difficult. Pioneers could mine coins on their laptops. Now, high-powered computer equipment is needed. “I’ve got a friend who forgot he had his computer mining Bitcoins in his garage—he checked and it’s worth about $12 million today,” says Kenna, 30, who is chief executive officer of Tradehill.
Owners store their Bitcoins in electronic wallets, which are identified by a long string of letters and numbers. The wallet 1933phfhK3ZgFQNLGSDXvqCn32k2buXY8a, for example, currently owns 111,111 Bitcoins, which amounts to more than $15 million sitting on someone’s hard drive. Whose hard drive is a mystery: While anyone can view the wallets, the owners’ identities are not public. As of April 2, there were about 250 wallets with more than $1 million worth of Bitcoins. The number of Bitcoin millionaires, though, is uncertain—people can have more than one wallet.
The value of Bitcoins began soaring in March, around the time European finance officials approved an unprecedented tax on bank deposits in Cyprus. While the plan did not go through, it led to concerns that other bank deposits might be taxed. The rising price drew increased media attention, which sparked further price gains. There are a little more than 11 million Bitcoins in existence. The software that governs the network will allow no more than a total of 21 million coins to be created.
Charlie Shrem, 23, discovered Bitcoins on a website in early 2011, when he was a senior at Brooklyn College. Shrem didn’t mine coins himself but bought them on Tradehill. His first purchase was 500 coins at about $3 or $4 each; he bought thousands more when the price hit $20. When he was still in college, Shrem started BitInstant, a company that allows its customers to purchase the digital currency from more than 700,000 stores, including Wal-Mart Stores (WMT) and Duane Reade (WAG). Shrem wears a ring engraved with a code that gives him access to the electronic wallet on his computer. Friends tease him that a thief could cut off his finger to get the ring. “They started calling me four-finger Charlie,” he says.
One of BitInstant’s investors is Roger Ver, 34, who ran for California State Assembly in 2000 as a Libertarian. On his Web page, Ver talks about moving to Tokyo after serving 10 months in federal prison for selling “a product called a ‘Pest Control Report 2000.’ It was basically a firecracker used by farmers to scare deer and birds away from their cornfields.” He says he was prosecuted unfairly because of his political beliefs.
Shrem calls Ver “Bitcoin Jesus” for the way he evangelized for the currency by giving away coins to anyone who would take them. “After discovering Bitcoin, I only slept maybe an hour a night for a whole week,” Ver says in an interview. “I didn’t leave my house and spent every waking moment reading about Bitcoin.” Ver says he got so sick that a friend checked him into a hospital, where he was given medication to help him sleep. He sees Bitcoins as a reliable store of value as Japan increases the money supply to boost the economy. “I’m much more bullish about the long-term prospects of Bitcoin than the dollar or yen,” he says. “I cashed out about a year ago—of dollars and yen.”
Like other Bitcoin users, Ver celebrates that “Bitcoin totally strips away the state’s control over money.” Bitcoin has drawn the attention of regulators, but no country has issued comprehensive rules governing the digital currency. “Virtual currency is a medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency,” the U.S. Treasury Department’s Financial Crimes Enforcement Network said in a March 18 report. (Hardly a clarifying remark.) The European Central Bank warned in October that the emergence of virtual currencies “could have a negative impact on the reputation of central banks” if their use grows considerably.
Many Bitcoin tycoons are devoting themselves to expanding the currency’s reach. Yifu Guo was a digital media student at New York University when he began mining some of the first coins, occasionally cashing in a few to help pay his rent. After he recognized Bitcoin’s potential, he quit school and founded a company called Avalon, which sells hardware built solely for the purpose of mining Bitcoins. He isn’t interested in a quick score, he says: “Our goal is to protect the Bitcoin network so profits are available in the long term.”
Tony Gallippi is CEO of BitPay, a payment processor he co-founded in 2011 that enables online merchants to accept Bitcoins. He says he includes Bitcoins in his investment portfolio along with stocks, bonds, and real estate. His company holds some Bitcoins as well. “We’d like to take advantage of the price appreciation. Everything we do to sign up more merchants and customers grows the user base.” That, in turn, lifts the value of BitPay’s own holdings.
Shrem, who estimates that his assets are split between Bitcoins and dollars, says he is not as driven by ideology as were some of the earliest Bitcoin adopters. Every time the price goes up 20 percent, he plans to cash in about 100 coins. Kenna, meanwhile, says he has no plans to cash out. “I’m doubling down.”
April 11, 3:53pm: Updated to include mention of the Winklevoss twins