Early investors in Bitcoin got rich. Now they are the cryptocurrency’s most powerful gatekeepers.
Every time you spend bitcoins to buy a drink at Evr, a swanky bar in midtown Manhattan that accepts the digital currency, you make its co-owner, Charlie Shrem, a little bit richer.
And that’s not only because a chamomile sour costs $17 (or 0.16 bitcoins). It’s because whenever someone new uses bitcoins, the electronic currency’s value tends to increase. Shrem has bought thousands of bitcoins for about $20 each, starting in 2011. Since then, the digital coins have soared in value to $109.
That’s turned the 23-year-old into a millionaire and into one of a handful of early bitcoin investors who’ve decided to sink their windfalls back into the bitcoin economy — starting their own companies and investing in others.
“Infrastructure is what we need,” says Shrem. “We’ve gotta build, build, build — financial software, exchanges and different payment products.” In addition to his investment in the bar, Shrem founded Bitinstant, a company that makes it possible to buy bitcoins at Kmart and 7-Eleven, and is a member of BitAngels, an investment group created this year to help Bitcoin startups evolve from garage operations into real companies.
Bitcoin angels like Shrem don’t have pockets nearly as deep as entrepreneur-turned-investors who’ve made it big in Silicon Valley — some of whom, like Steve Case and Vinod Khosla, have net worth in excess of $1 billion. But their influence is substantial. As conventional investors begin to show interest in Bitcoin startups, it is small-time tycoons like Shrem who are acting as gatekeepers and ambassadors.
“The early guys are the ones that run everything,” says Shrem. “In this space, how long you’ve been around matters.”
Bitcoin originated in 2009, when its source code was posted online by persons unknown. Despite its mysterious origins, the way it works is transparent: The currency is produced when people carry out difficult cryptographic operations on computers, and then it’s exchanged over an open-source peer-to-peer network. Bitcoins are immune to counterfeiting and don’t rely on any central authority. Image courtesy of Bitcoin Charts
Initially, Bitcoin was mostly a curiosity. Among the first businesses to accept it were gambling sites, narcotics delivery services and a farm selling alpaca socks. Yet Shrem and others have been thinking strategically, creating companies that comply with the law and intend to make Bitcoin a widely used form of money.
One reason to do so is that the number of bitcoins is limited; there’s a theoretical maximum of 21 million, and 11.3 million have been “mined” so far. That means the more people buy and use bitcoins, the greater their value becomes. Anthony Gallippi, CEO of Bitpay, an Atlanta company that helps online stores accept payment in bitcoins, says one reason early buyers are reinvesting in the technology is to “ensure future returns” on the currency’s value.
“You didn’t get that dynamic in the dot-com days,” says Gallippi, who claims that he and business partner Stephen Pair are sitting on “thousands” of bitcoins they purchased for $1 or $2. He reasons that anyone who now buys even one bitcoin is in effect betting “on the whole space.”
The easy windfalls earned by Bitcoin’s early promoters are attracting interest from mainstream venture capitalists. In May, Shrem’s company received $1.5 million from the investment firm of the Winklevoss twins (who famously sued Mark Zuckerberg over the idea behind Facebook). Also last month, the venture fund operated by Peter Thiel, Facebook’s first major investor, invested $3 million in Gallippi’s company.
Those deals have been important endorsements for the online currency (see “Big-Name Investors Back Effort to Build a Better Bitcoin”). Yet what they mean for the philosophy at the heart of Bitcoin isn’t as clear, says Roger Ver, an important early investor.The 34-year-old electronics entrepreneur says he sank his life savings into the currency and has used the gains to invest more than $1 million in more than a dozen Bitcoin startups, including Shrem’s. “The typical investment size has been around $100K USD,” Ver wrote in an e-mail from Tokyo, where he lives. “I’m motivated by the positive ways in which Bitcoin use being widespread will make the world a better place.”
Like many early enthusiasts, Ver, who once ran for the California senate and later spent 10 months in prison for selling fireworks on eBay, was attracted to Bitcoin because of his libertarian, antigovernment views. He believes such currencies, if they replaced national ones, could make it impossible for governments to “finance their wars” by printing money.
With mainstream investors arriving, Ver says, the Bitcoin economy could become a lot less idealistic. Yet these new investors may be unwittingly boosting the political and economic implications of the decentralized currency, not just its face value. “I don’t think they fully understand how revolutionary Bitcoin will be,” he says.
Composite by Mashable, images courtesy of Bitcoin and Vyacheslav Argenberg/Flickr
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This article originally published at MIT Technology Review