The ghost of Bitcoin

In search of Satoshi Nakamoto, the man behind the most famous virtual currency, Polygon finds a harrowing digital economy only a gamer could love.

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atoshi Nakamoto doesn't exist. Or, at least, if he does, he's one of the rare modern individuals who is practically impossible to locate.

Nakamoto is the creator of Bitcoin. Over the years since the virtual currency's inception, there have been several quixotic expeditions to find him. Some have been more thorough than others.

Investigators have alternately concluded that he (for the sake of argument) is either an economic sociologist from Finland, an American financial speculator, a student in Dublin or a confabulation of one or more computer scientists. Some theories suggest the pseudonym is an accretion of the names of four corporations: Samsung, Toshiba, Nakamichi, and Motorola.

These theories can't all be right. They are, quite likely, all wrong.

In a world where anonymity is no longer expected, where privacy is on the way out, this person (or persons) has kept their true identity secret. Even Osama Bin Laden was eventually found. And yet, so far, not Nakamoto. This person is a modern myth.

Polygon set out to find Nakamoto anyway.

The journey began with a small set of clues. Nakamoto published a document in 2008, a whitepaper describing Bitcoin. From it, we can see that his prose is British, his tone is affluent and his name is Japanese.

Looking closer, we can see that at the beginning of that document Nakamoto lists his contact information: a address. is a free, private, encrypted email service. Short a shady friend at the NSA, this address was useless.

Or was it?


What is a Bitcoin?

In that same 2008 paper, Nakamoto described Bitcoin as a solution to a problem in the way modern financial institutions manage transactions.

"Commerce on the Internet," Nakamoto wrote, "has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. But these same institutions have to protect themselves from fraud, which means they must retain the ability to reverse fraudulent transactions on behalf of themselves and their customers."

It is a teleporter for money; smash value into your end of the internet and it squirts out the pipe on the other side of the world. Easy peasy.

You must trust the institution handling your money, and that trust is expensive for an institution to maintain.

Nakamoto suggested Bitcoin was the solution. Transactions in Bitcoin are "non-reversable [sic]." Instead of trust, trade in Bitcoin is based on "cryptographic proof." The same kinds of algorithms that protected Nakamoto's identity at are what make his peculiar brand of money so unique.

The calm voice and reassuring smile of the teller at the bank, the promise that "I'll take care of that for you" should something go wrong, is replaced in the Bitcoin economy by the cold calculation of math. Incredibly complex math.

The effect this has on how money flows is revolutionary. Instead of wiring money between accounts, allowing banks and other financial institutions to mediate the exchange, trading Bitcoins is as simple as handing someone a chunk of gold. It is a teleporter for money; smash value into your end of the internet and it squirts out the pipe on the other side of the world. Easy peasy.

In order to follow Nakamoto's trail any further I would have to learn more about cryptography and the role it played in creating and maintaining the Bitcoin economy. So I decided to call in a favor.


The Russian connection

To my knowledge, Eugene Kaspersky, CEO and co-founder of Kaspersky Lab (an internet security company), is the only graduate of a KGB-sponsored university to follow me on Twitter. I asked if, with his background in cryptography and computer security, he could help me find Nakamoto. He said no, but he knew someone who could.

Stefan Tanase is a senior security researcher in Kaspersky's employ. Part of what he does for a living is trawl the internet looking for the strangest electronic fish in the sea. Viruses, trojans and worms are a delicacy in Tanase's line of work, and the most exotic specimens end up in his inbox every day.

Kaspersky told me that Tanase specialized in Bitcoin. Perhaps he could tell me who Nakamoto was.

"I would be proud if I could answer that question," Tanase said. "The short answer is I have no idea."

And so I began to imagine Bitcoins not as a pile of physical things, but as a vast ocean of code that has been created by Satoshi Nakamoto.

The address was, more than likely, the endpoint in a long series of fictitious accounts designed to hide Nakamoto's true identity. Since they were encrypted it would take something like a court order to open them up for investigation, and Nakamoto hasn't done anything necessarily wrong.

"Even when we take part in criminal investigations involving federal crime cases, it's usually limited to analyzing the technical capabilities of the malware. So it's not necessarily our job to try to track [Nakamoto] down. ... We're more interested in seeing the bigger trends."

So without the key to open that email account, it was closed permanently. Oddly enough, Tanase said, that's how Bitcoins work as well. The system that Nakamoto designed depends on incredibly strong cryptography to lock Bitcoins up. Without something called a "private key," a series of characters that you punch into a keyboard, a Bitcoin is just a piece of code sitting on a hard drive. And it may not necessarily be your hard drive where your Bitcoin lives.

Due to the nature of cryptography, the private key only works to open the coin and not the other way around. Because of this fact, the code for all the Bitcoins in the world is open to all the participants in the Bitcoin economy. Trade in Bitcoins takes place on all the computers that elect to take part in the trade of Bitcoins through a shared, peer-to-peer network.

Nakamoto wrote in his 2008 paper that a "timestamp server" would "generate computational proof of the chronological order of transactions." Every Bitcoin that moves is marked, in a way, mathematically so that transactions cannot be forged. This creates an incorruptible chain of transactions. The mathematical opening, closing and spending of these coins is verified by all the computers in this peer-to-peer network simultaneously.

And so I began to imagine Bitcoins not as a pile of physical things, but as a vast ocean of code that has been created by Satoshi Nakamoto. The private keys allow people to reach into that ocean and take only the coins that belong to them, and to transfer that ownership however they desire.

What keeps Stefan Tanase employed is the fact that the growth of this large, peer-to-peer network has created an unprecedented opportunity for cybercriminals to make money off of Bitcoins.


Gold rush

When someone connects their computer to the peer-to-peer Bitcoin network they are yoking their CPU to the grand wheel that grinds out all the math, the cryptography, that makes the trade of Bitcoins work. And for their trouble they occasionally get tipped in Bitcoins.

The process is called "mining" for Bitcoins. Anyone can download a miner, install it on their computer and participate in making the math that underpins the Bitcoin happen, and actually earn Bitcoins in return. Feed a computer electrons, and that computer prints virtual money. The more computers involved, the faster money gets generated.

Tanase said this has given cybercriminals the world over something to do with all the computers they have infected with malware, collections of machines called "botnets." When a botnet isn't busy participating in a denial-of-service attack on a major website or sending faux-Nigerian money laundering spam, it can be used to mine Bitcoins.

Because the Bitcoin has become so popular there are actually more honest miners than cybercriminal miners and that, Tanase said, protects the Bitcoin network from being hacked.

At this moment there are thousands of botnets, big and small, hundreds of thousands of computers earning cybercriminals Bitcoins. High-end graphics cards are better at mining than high-end CPUs, so gaming PCs are actually better at mining coins than others.

"If you try mining yourself," Tanase said, "and see how good you do with one really good graphics card, and then if you check out the statistics of one mining pool and you see that the top contributors, the top people earning Bitcoin on their specific mining pools, you get the feeling that most of them are probably — I would say the vast majority of them — are running botnet mining operations. Because when you see how much revenue they generate it's really almost totally impossible to do it with real hardware, by buying thousands of graphics cards."

Because the Bitcoin has become so popular there are actually more honest miners than cybercriminal miners and that, Tanase said, protects the Bitcoin network from being hacked. It is a sort of virtual gold rush, where more people are opening mines every day, lured in by the rising price of the Bitcoin, somewhere north of $100 each today.

But Nakamoto designed the Bitcoin algorithm so that there are only so many Bitcoins to be mined. Just like in California in 1849, there are only so many stakes in the Bitcoin fortune to be claimed. And as the record of Bitcoin transactions grows, the math needed to keep track of them all gets harder and harder to compute. The rate of new Bitcoins being created, Tanase says, has already begun to slow. You now need more computing power than ever before to create coins at anything other than a snail's pace.

Nakamoto knew this. That's why he broke ground on his own mine first.


Nice hat

There are few academics better versed on the subject of virtual economies than Yanis Varoufakis, formerly Valve's economist-in-residence. Today he is on the faculty of the University of Texas, while at the same time serving as the advisor to the general secretary of the Organisation of Economic Co-operation and Development (OECD) in Paris.

Varoufakis is simultaneously the leading economic theorist on the subject of trading virtual hats, and one of the few invited to contribute to an ongoing conversation about how European economies should proceed following the global economic disasters of the mid- and late 2000s.

I needed him to help me make more sense of how the Bitcoin economy functioned, which is good because when I spoke to him he made it clear that he could not care less about the real identity of Satoshi Nakamoto.

"The Bitcoin experiment is unique in the sense that no one controls it."

Varoufakis is a busy guy, but I wanted to know why he took the time to write about Nakamoto in an elegant blog post from late April. In it, Varoufakis almost casually guts Bitcoin, coming very close to calling Nakamoto a fool, one so in love with his own idea that he can't see the flaws in the system he's created.

"All the other [virtual] economies that I've studied are centrally controlled," Varoufakis told me. "They are not controlled by central banks, or by governments. They are controlled by corporations. ... The Bitcoin experiment is unique in the sense that no one controls it. So, effectively, it is a set of tools that allows anyone who uses them to be co-owner of that community.

"Every monetary community allows within itself for very significant degrees of freedom ... to tamper with the money supply to create more of it, to create credit institutions which expand the money supply."

Varoufakis was careful to choose his words as we spoke. These freedoms that members of an economic community have can be for good or for bad, hence "tamper." To create a line of credit by loaning out money in excess of the amount of cash in your coffers, is just as much tampering with the value of a currency as double-spending it.

Getting a loan from Bank of America, Varoufakis said, is not so different as being paid in Bitcoin that someone has fraudulently spent elsewhere. It all depends on the rules you're playing by, and the simulation created by Bitcoin's virtual economy most resembles the rules that existed during what was called the "gold standard."

Playing by those rules, every U.S. dollar was backed by an equivalent amount of gold held somewhere by the U.S. government. The dollar was little more than an IOU from the Federal Reserve, a receipt for a tiny sliver of the Federal hoard. By adding to, or subtracting from, the gold physically held by the Federal Reserve, the U.S. government could change the value of the dollar relative to the other currencies of the world.

But there came a time when the Federal Reserve needed more flexibility than the gold standard allowed.

"The gold standard has been on and off for 100 years," Varoufakis explained. "Whenever there was some major perturbation in the economy, in society, the gold standard went out of the window ... [like] during the First World War or the Second World War, or the Great Depression ... or later the Vietnam War."

President Richard Nixon ended the gold standard in 1971. Since that time the U.S. has run on something called "fiat money."

"In other words," Varoufakis said, "we have money whose quantity is controlled by the state — by the Federal Reserve in the United States, by the European Central Bank, by the Bank of England, by the Bank of Japan — in a manner that seeks to effect price stability by other means, not by tying the money supply to some quantity of physical metal."

Without the gold standard, the Federal Reserve can, through various means, create more money in the U.S. economy. But like the finite amount of gold that used to be held in Fort Knox, there are only 21 million Bitcoins that will ever exist. It's part of the algorithm that Nakamoto made. Scarcity is baked into the system and is the only lever by which the entire virtual economy is controlled.

A system built of numbers has only a number, deaf and dumb, with its hand on the wheel. And that's where things get interesting.

What Nakamoto did by limiting the number of Bitcoins was to revert back to the gold standard. Instead of stifling mineshafts, Bitcoins emerge from computers across the world. But the concept, the scarcity of the monetary vehicle, is the same.

"We are going to end up with a fixed number of Bitcoins," Varoufakis said. "Already we are hitting the buffers in a sense that the rate of increase in the number of Bitcoins available is falling. And it will keep falling. ... When we reach [21 million] it will be as if all the gold from the guts of the Earth has been unearthed."

A Bitcoin researcher, in a blog post from April, found recorded in the chain of Bitcoin transactions evidence that one miner got a head start on everyone else in the world.

It's possible, probable even, that Nakamoto has many of the first Bitcoins ever mined, a stockpile of nearly 1 million stuffed beneath his virtual mattress. At current exchange rates Nakamoto's hoard could be equal to more than $100 million.

That means that the single largest stockpile of Bitcoins in the world is owned by one man.

I had already come to the conclusion that I might never find Nakamoto. But, with Varoufakis' help, it was time to try and get inside his head.


Max level play

Does holding Bitcoins make you more powerful in that virtual economy? To Varoufakis, that's not really the right question.

"What is worrying about the Bitcoin economy [today]," Varoufakis said, "is the lack of balance between the demand for Bitcoins for speculative purposes as opposed to the demand for transaction purposes." There aren't enough people trading Bitcoins, and the majority of the currency is sitting idle in people's accounts, people like Nakamoto. This is creating a bubble.

In Greek and Roman times, change was made by literally cutting coins in half. Bitcoins can be subdivided as well, down to the 1/100,000,000, a denomination dubbed the "Satoshi." But Varoufakis says that when the last Bitcoin is mined there will be no more to go around, causing deflation. As the Bitcoin economy continues to grow, there will be the same amount of money shared in the system, and no amount of chopping it up will help it spread far enough.

What will emerge is an entrenched Bitcoin aristocracy, with Nakamoto and others playing the role of feudal lords, high level players who cannot be taken down until they choose to give away their loot.

What will emerge is an entrenched Bitcoin aristocracy, with Nakamoto and others playing the role of feudal lords, high level players who cannot be taken down until they choose to give away their loot. And their only incentive to give up that loot is, naturally, for profit.

But if Nakamoto splashed his hoard into the Bitcoin economy now in a bid to take his profits and run, he could poison the well. People would flee from the Bitcoin; the currency would become devalued even faster than when it's mined out.

I began to wonder if perhaps Nakamoto wasn't holding onto his stash to profit. Maybe he was holding it as a kind of doomsday device, the killswitch for the whole Bitcoin experiment. So why would he want to press that button?

Varoufakis sidestepped the question.

"I am not one into conspiratorial theorizing, and I don't like to project onto other people a suspicious mind's reflections."

Clear enough. He left me to draw my own conclusions. Luckily, there was one more person I could to talk to.


An alternate universe

Eyjolfur Guomundsson is a doctor of environmental and resource economics. In his position as the lead economist for CCP's Eve Online, he presides over one of the most complex in-game economies ever created. Eve has become the poster child for complex, time-devouring MMOs. It is derided by many as a game so arcane that it plays itself, while others say that its community behaves more like virtual mobsters than any low-level thug whose caricature has waved a gun around a Grand Theft Auto game.

Above all else, Eve is a set of virtual businesses that operate within virtual economies using virtual currencies. That's the hook. That's what makes the game exciting.

"Virtual currencies are basically like any other currencies," Guomundsson told me. "That is, a measure of economic value that is used in a system. In a gaming system ... the designers can decide to keep it a closed or an open system." A truly open system is rare in games, since it allows you to put money into the game and then take it out as real money.

You can, for instance, sell your hats and trading cards in Valve's Steam Marketplace. But you can't necessarily get that money out of your Steam Wallet and buy diapers or medicine at Walgreens. The only example Guomundsson could think of, or that I could find, is Second Life, whose in-game currency can be exchanged for dollars and vice versa on an exchange called the LindeX.

"Virtual currencies are basically like any other currencies. That is, a measure of economic value that is used in a system. In a gaming system the designers can decide to keep it a closed or an open system."

Almost every virtual economy that exists in a video game is closed in order to allow for different rules and different regulations than you can have in real life. There is no Galactic Federal Reserve controlling interest rates in Eve. There is only a corporation, a real-world corporation in Iceland called CCP, telling you what you can and cannot do with its virtual money.

Oddly enough, Eve itself contains two kinds of currencies. One type of currency, the ISK, exists only in-game, while PLEX can be purchased with real world money. Different rules apply to each currency's economy once it exists in-game, but where those economies meet inside Eve is very much like where Bitcoin meets the U.S. dollar. The major difference is that you cannot remove ISK or PLEX from Eve. There is no legal way to cash out.

"We monitor quite carefully the player's interactions," Guomundsson said. "If you are found out trying to sell virtual items for real life currency you are instantly banned from the game. Because we want to keep this closed, because we want to have different rules and different regulations than what you find in real life."

While that does not prevent the in-game economy of Eve from growing, it does keep CCP out of the jurisdiction of international monetary organizations. It effectively walls off the virtual currency from real ones.

But what if those walls were broken down? Guomundsson told me about a time when a virtual currency did just that.


End game

In March 2007 China's QQ coin, a virtual currency earned by playing mini-games online, jumped in value more than 70 percent in a matter of weeks. That's because the Chinese began using QQ coins outside of the virtual world, through various means, to buy physical things like music CDs and makeup and for services like erotic sessions of online chat. By playing a game, people were able to create value in the real world.

Earning QQ coins is analogous to mining Bitcoins, with one exception. QQ coins were maintained by companies inside a sovereign state with its own fiat currency, namely China. Regulations were quickly passed to nerf the QQ coin before it destabilized the yuan.

Bitcoin cannot be nerfed. There is no organization to punish for its spread. It is loose in the wild, an open-source monetary instrument outside the control of any one nation. But in Guomundsson's eyes, it is far from perfect. Bitcoins are a bubble, he told me, echoing Varoufakis. Bubbles burst.

"The ancient Greek word for money, for currency, is 'nomisma.' It comes from the verb 'to imagine.'"

But what if there were a better Bitcoin? Guomundsson sees the seed of it inside social media. Where trust in financial institutions is expensive, and where by contrast Bitcoin enforces the inexpensive trust of mathematics, what if real trust came to exist through a system like Facebook, or Twitter?

"As soon as [social network] connectivity reaches a level where people start to trust each other," Guomundsson said, "and they start to trust information within that social system, having value exchanged through any kind of means of transaction is a natural phenomenon."

Members of a social network will search for value, Guomundsson told me, just as water searches for a path through a dam. It is a natural force, an evolutionary step. It's how primitive man began to trade in the first place.

"Once you have that exchange in value being efficient, then people start to look for something that they can use as a currency, be it any type of virtual items that are available within that social network, or something provided by the network itself. So the world is truly in a place where it has never been before, and this is something that I don't think a lot of either academics or governments have realized at this point."

Facebook and Twitter are not the harbingers of economic doom, however.

"Facebook is a poor example," Guomundsson said, "because the very core of Facebook is to minimize the size of groups; you want to talk to your old buddies, you want to keep up with your family members and so on, but you are not really trying to connect to the rest of the world.

"What if somebody would come up with a social network that's all about connectivity?" Guomundsson thinks a game like Eve could be that network, but it's nowhere near large enough. But someday it, or something like it, could be.

I wonder if perhaps Nakamoto expected this. Perhaps his vision was far-reaching enough when he conceived Bitcoin, that he also conceived the end of Bitcoin. Perhaps his hoard, his $100 million stockpile, is the high-level hammer he chooses to hold in reserve. Maybe Nakamoto's end game is to destroy Bitcoin so that another, more perfect instrument can take over the global economy.

Or maybe not. Perhaps he just wants to be rich, a scenario that both Varoufakis and Guomundsson think is as unlikely as it would be catastrophic to the Bitcoin.

Nakamoto is either a much smarter person than we give him credit for, or he's just another clumsy thief.

But one comment that Varoufakis shared still stays with me.

"The ancient Greek word for money, for currency, is 'nomisma.' It comes from the verb 'to imagine.'

"So money has value to the extent that we imagine that it has value, according to the ancient Greeks. They knew that more than 2,000 years ago, and we kind of forget that simple, important notion at times." Babykayak

Illustrations: Steve Kim
Editing: Russ Pitts, Matt Leone

Design / Layout: Warren Schultheis, Matthew Sullivan