How One Scrappy Startup Survived the Early Bitcoin Wars
The girls were dancing on a neon tank,
wearing sequined bikinis lit up by red and green laser light. A strobing fixed-wing aircraft passed overhead like the acid-trip kissing cousin of a Mitsubishi A6M Zero, with more sequined women dangling from it, trapeze-style. Flashing robots had preceded them — wheeling through the room, pumping their fists at the crowd — while the audience, seated on tiers of glittery red plastic swivel chairs, waved glow sticks. As the music throbbed, twin walls of video screens threw up bizarre images. The Technicolor dream machine the women were using as a stage displayed, at the end of its barrel, a rainbow-colored star — just where, on an ordinary tank, the death comes out. But this was no ordinary tank. It was a fixture of the one-hour show that takes place three times a night at Robot Restaurant, a kind of eye-melting Japanese dinner theater, a cabaret show of such migraine-inducing decadence that Las Vegas falls silent before it.
On this hot Tokyo night in July 2013, two Americans, Roger Ver and Nicolas Cary, sat in the crowd. As far as Cary could tell, they were the only gaijin in the place. He was drinking a beer, while Ver, as usual, was abstaining. Their unappetizing bento boxes sat untouched: you don’t go to Robot Restaurant for the food. In the midst of the cartoonish spectacle — earlier, a woman wielding an oversized mace had ridden in on a stegosaurus to battle two heavily armored robots — they had business to discuss. Ver wanted to see if Cary could become the chief executive of Blockchain, a Bitcoin startup in which Ver was the sole investor and majority stakeholder. (The company’s name was a direct nod to the term “blockchain,” the groundbreaking technology that underlies Bitcoin and other cryptocurrencies, making it possible to process and verify transactions transparently without the need for a central authority.) Cary had come highly recommended by Erik Voorhees, an old college friend who was himself a Bitcoin pioneer, and who in turn had given Cary an earful about Roger Ver. Talking to Ver over Skype, Cary had liked what he’d heard enough to hop on a plane from Seattle the following weekend to continue the conversation in person.
Robot Restaurant, which is located in KabukichÅ, an entertainment and red-light district in Tokyo’s Shinjuku ward, is Roger Ver’s first choice when it comes to entertaining Western visitors, presenting as it does the spectacle of Japanese eccentricity and excess beyond one’s wildest imagination. He wanted Cary to have a good time, because he wanted to end his search for a CEO. He had been interviewing candidates for weeks and had no strong contenders. He had been relieved when Voorhees reached out one day and said, “I think I know the right guy for you.”
The spectacle was also part of Ver’s self-presentation. Although an American (he has since renounced his citizenship), he had lived in Tokyo for much of the past seven years and was fluent in Japanese. As a teenager, he had read a lot of science fiction — Arthur C. Clarke, the techno-utopian Foundation series of Isaac Asimov, Neal Stephenson’s Cryptonomicon — and for him the language of sci-fi was bound up with Bitcoin and with the libertarian principles it was founded on. At the first Bitcoin conference in New York in 2011, where he had met Voorhees, it had felt as if he were entering the most exciting science fiction novel of all. Having read so much about futuristic systems of money and credit, he found himself thinking, This world-changing invention is finally here.
“Before Bitcoin,” Ver says, “I was just waiting around for the Singularity” — the hypothetical point at which, some people believe, technological progress will reach a sort of event horizon, past which human civilization will change in radical and unforeseeable ways, becoming “post-human.” And now here he was in Tokyo with his digital millions and a Japanese wife, living fifteen minutes into the future. He was living proof, if anyone was, that a new kind of expatriate existence was possible, bankrolled by borderless money.
Even so, most people would have laughed at him. In 2013 Bitcoin was still in its infancy, not yet an asset with a market capitalization of more than $27 billion. Goldman Sachs and the New York Stock Exchange had not yet invested millions in digital currency startups. The technology that powers Bitcoin had not yet made the cover of The Economist. It had not yet given rise, as it has today, to hundreds of new digital tokens that have the potential to transform not only banking and payments but the entire internet.
But Cary, then twenty-eight, with approachable face that telegraphed his openness to the world, wasn’t most people. He listened with interest to what the older man had to say. Ver’s pitch was simple. He painted a picture of a world with no barriers to financial inclusion, the world where people could transact peacefully without government interference. He explained the role that Blockchain could play in building this world. And then he said three words: “We need help.”
The First Wave Crashes
At stake was the best Bitcoin company remaining from the first wave of start-ups. Many of the others had gone down in flames, due to mismanagement or fraud, or had been hacked, taking thousands of bitcoins with them. Some — like Bitcoinica and BitInstant — had even generated lawsuits. Blockchain was different. Despite being the most popular Bitcoin wallet service in the world, it had never suffered a major crisis. Its founder, Ben Reeves, was smart and dedicated. He had already built the website, released iPhone and Android apps, and was handling customer support. “It’s amazing that one human being was able to do all of that,” Ver says. But Reeves, a British programmer who for two years had been running Blockchain as a one-man show, was getting overwhelmed. Roger, who had provided seed funding to Reeves in 2012 in exchange for a majority stake in Blockchain, didn’t have time to run the company himself.
They needed new blood at the top, and Nic Cary seemed like a real go-getter. The other candidates had failed to impress. “They didn’t seem to have a strong enough personality type or they didn’t seem to be in a big enough hurry,” Ver explains. “Bitcoin never sleeps. We need to move quickly and grow quickly and do everything sooner rather than later. I felt that sort of drive and energy and passion from Nic.”
For Cary, the opportunity meant a chance to revitalize himself. After more than six years at his current job, a software company he’d joined only months after graduating from college, he was burned out and looking for an escape hatch. Taking the top job at a Bitcoin start-up would hardly lighten his load, he knew, but it would fill him with new purpose. The world Ver had described was one in which Cary himself wanted to live.
Blockchain was perhaps uniquely suited among Bitcoin startups to make that world a reality. Although the Bitcoin protocol had been designed to eliminate counterparty risk — the risk that comes with giving up custody of one’s money — services had quickly sprung up offering to take this newfound digital wealth, nd the hassles that came with storing and securing it, off people’s hands. Some of these were exchanges; others were wallet services. Several ended up being disasters. In September 2012, an exchange called BitFloor was robbed when an unencrypted wallet backup was accessed by hackers during a manual transfer of data. Around 24,000 bitcoins — then worth about $250,000 — were stolen, causing the exchange to halt operations briefly. (At recent prices, those ill-gotten gains would be worth more than $38 million.) When it reopened, it began slowly recouping users’ losses, but shut down for good on April 19, 2013, after its US bank refused to continue providing it with banking services.
Another flameout was PicoStocks. Launched on Christmas Eve 2012 as an unregulated stock market denominated in bitcoins, and supposedly incorporated in the Marshall Islands, PicoStocks attempted to circumvent federal securities regulations by operating as if PicoStocks itself owned the assets and traders merely purchased dividend streams. According to its founder, the stock market suffered a hack attack in June 2013 in which 1,300 bitcoins were stolen, the result of PicoStocks using duplicate passwords for multiple accounts — a practice the founder himself described as “just extremely stupid” and “clearly our fault.” Five months later, PicoStocks announced that it had been robbed again. This time a total of 5,896 bitcoins were missing from both its “hot” and “cold” wallets. Because cold wallets can’t be accessed in online attacks, the theft may have been an inside job.
Worst of all was Bitcoinica. The brainchild of a seventeen-year-old named Zhou Tong, who lived in Singapore, Bitcoinica launched in September 2011 as a service allowing people to trade digital currency on margin, a high-risk, high-reward strategy that can potentially yield huge profits. The trading platform soon became immensely popular, home to more than $1 million in customer assets. At its peak, Bitcoinica’s trading volume was nearly as high as that of Mt. Gox, then the world’s largest Bitcoin exchange. Its downfall began in March 2012, when its host server was hacked and some 43,000 bitcoins were stolen, an amount then worth about $220,000. Customers’ faith was shaken, but Bitcoinica covered the losses out of its own reserves.
Then disaster struck.
As would later happen with PicoStocks, Bitcoinica was robbed a second time. This time, on May 11, 2012, the hot wallet was hacked, and 18,547 bitcoins — $92,500 worth — were stolen. It was too much. Bitcoinica shut down immediately and started a claims process by which customers could attempt to recover their deposits. But the hacker had deleted the platform’s account registry, making it impossible to verify users’ account balances without making a painstaking examination of the trading records. It was a sobering lesson in what can go wrong when teenagers get their hands on the levers of finance. At the time, Roger Ver himself had 24,841 bitcoins on deposit with Bitcoinica. He didn’t want to see it die. Behind the scenes, he began working on a plan for him, Jesse Powell, and two other men to buy Bitcoinica for enough money to make every customer whole — everyone except themselves.
But the lesson still wasn’t over. Only a few weeks before the second hack attack, Zhou Tong had sold Bitcoinica to a group of investors, who in turn had hired a three-man team with prior digital currency experience to build and manage the service. While the claims process crawled along, one of the team members, Charlie Shrem’s friend Amir Taaki, decided against all reason to publish Bitcoinica’s source code on the Internet. Releasing the code publicly like this — evidently in keeping with the Cypherpunk attitude that software wants to be free — immediately tanked Ver’s proposal to buy Bitcoinica, since whatever value its intellectual property had retained was now destroyed. Worse yet, within the code was the password to an account which, like a digital strongbox, held everything necessary to access Bitcoinica’s account at Mt. Gox.
Realizing this, a thief took advantage on July 13, withdrawing from the Mt. Gox account the maximum amount possible: forty thousand bitcoins and $40,000, worth a total of $350,000 at the time. Bitcoinica — its finances now in shambles, its leadership team no longer communicating or even attempting to issue refunds — went into receivership so that whatever funds remained could be disbursed to former customers. Nobody, including Roger Ver, had any hope of recovering all of their money.
When Zhou Tong had first announced Bitcoinica to the world, a member of a forum had given him a warning: “Systems that work with money are attacked hard and often, by intelligent skilled people… Spectacular failure is your destiny if you don’t work very hard to prevent it. Spectacular failure may be your destiny even if you do work very hard to prevent it. You should plan accordingly.”
“There’s no counterparty risk, there’s no central authority, there’s no merchant processor, there’s no bank, there’s no one telling somebody what they can and can’t do,” Cary says today. That meant no government could freeze your Bitcoin assets if they were stored in a Blockchain wallet. No government could bar you from sending money to whomever you liked — say, a relative in Cuba. And no government could ever force Blockchain to divulge information about customer assets, making it the wallet of choice for Roger Ver and thousands of other privacy-conscious individuals.
The radical notions underlying this business model included taking seriously the power to let users be their own banks, despite the inherent challenges. “The true promise of Bitcoin is to let money move around the world instantly and basically for free, just like email does for information,” Cary says. And in order to do that, you have to trust people with the custody of their own funds.”
When Cary met Ver in Tokyo in 2013, there were only about 350,000 Blockchain wallets, while the market cap of Bitcoin itself, depressed since the popping of the April price bubble, hovered at around $1 billion. A drop in the bucket compared to most of the world’s national currencies. But the potential was there — the potential for it to be much more than simply the coin of the realm for the digital underground. As Alex Waters, a former Bitcoin developer who once worked alongside Erik Voorhees, puts it, “Privatizing Bitcoin for one thing — black markets — is really unfair to humanity.” And Cary is the kind of man who thinks about humanity; who considers, in choosing his personal path, what might be best for the world at large. On this basis, Bitcoin attracted him. “You can let people have universal financial sovereignty. That’s the promise,” he says.
And so he allowed himself to be led through KabukichÅ, past maid cafés and blaring pachinko parlors, strip clubs and ramen shops, past kanji climbing skyward up the sides of buildings in a canyon of raw commerce, air thrumming with lust and money, streets full of punters alive to the lure of ancient enticements, a carnival amid which stood the strobing portal of Robot Restaurant. It was the gaudiest thing around in maybe the gaudiest district in all of Tokyo. “Only the Japanese mind could think of this,” Ver says. Even then, on the brink of an epileptic’s nightmare, neither man knew all that much about the other. But they would soon learn.
Cash For the Shadow Economy
Nic Cary was born in Denver, where he grew up loving the cold and the outdoors, a child of three cultures. His mother’s family had emigrated to New York from France in 1946, and his mother, with whom he lived after his parents’ divorce, imparted to him a fluency in her native tongue. His father settled in Chile, where Cary visited him once or twice a year, picking up Spanish while being inducted into the joys of fly fishing and the Hemingway tradition of literate manhood.
At sixteen, enamored of the Internet despite the cratering of the dot-com sector, Cary started a small web design company with a friend, building online storefronts and custom software tools for businesses. Two years later he enrolled in the business leadership program of the University of Puget Sound, a liberal arts college in Tacoma, Washington. A hive of intellectual curiosity, with many interdisciplinary programs, Puget Sound proved to be fertile ground for his development. Students in the international political economics and business leadership programs were pushed to expand their thinking beyond their own narrow fields; they were encouraged to cross-train in the history department. Another student from Cary’s class of 2007 recalls a freshman-level course on the warrior poets of Asia. It was a campus that prized broad-mindedness, intellectual discussion.
It was a fateful choice. There, during his first week of classes, Cary met a fellow transplant from Colorado, a tall blond freshman, likewise majoring in business leadership, named Erik Voorhees. They clicked immediately. It was one of those rare occasions in life when a glancing blow with someone is sufficient to cement a friendship forever. Living across the quad from each other, they developed an incredible rapport. Together they pledged Sigma Chi — a dry fraternity, like all the fraternities on campus — of which Cary eventually became president. Though Voorhees lacked the natural leader’s talent for consensus-building that Cary displayed, he enjoyed playing devil’s advocate, and was more precocious in the formation of his philosophy and politics. “He really challenged my perceptions on politics, on economics,” Cary says. “We used to discuss all kinds of wild things.”
In turn they challenged their fellow students. A fraternity brother, Nick Vasilius, who also shared classes with them, recalls them sticking to their guns and challenging preconceived notions. “One thing they did not like was when people would just read a textbook and then regurgitate it back in class without thinking about the context or the implications,” he says. “You know, the type of person who just read the assigned reading and came to class ready to write it in a test. They really prized people being able to defend their points of view, and they were not shy about doing so.”
AI and Bitcoin Are Driving the Next Big Hedge Fund Wave
One class, The Illicit Global Economy, provided more than its fair share of provocative discussions. Students were asked to analyze the international markets for organs, narcotics, exotic animal parts, weapons, antiquities, and even human beings, seeking to understand how they operated, who was involved, and why the trade in such contraband persists. According to its Fall 2015 syllabus, the class also examines ethical questions arising from “relationships that exist between states, illicit entrepreneurs, criminals, multinational corporations, rebel groups, and consumers.” If any material was going to push Voorhees’s laissez-faire brand of political economics to the breaking point, this was it. Cary, who thought it a good policy to listen more than he talked, found the class enlightening. “Any time that you create a regime to manage a marketplace, you also increase the incentives to break the rules,” he says, explaining the crux of what he learned. “The people that can work around the rules make an incredible amount of money.” In other words, illicit economies arise as a result either of governments outlawing certain desirable commodities or of deficits in their supply.
Class discussions were spirited and produced surprising intellectual bedfellows. Radical feminists found themselves advocating alongside libertarians for the legalization of the sale of organs and other body parts, on the grounds that women have the right to do what they want with their bodies. Nick Vasilius, who took the class with Cary and Voorhees, remembers the War on Drugs providing fodder for one of the most enjoyable classroom discussions he ever had. He recalls it this way: “Basically the viewpoint that Nic and Erik and a few other classical [liberal] guys put forward was, ‘This is something that people want. The market is going to meet these needs, and it’s just going to enrich drug cartels if the government doesn’t acquiesce to the global market.’
“And I remember we had another class member who took kind of an absolute moral viewpoint that drugs are bad, period, and drugs lead to moral decay, period; and it’s the job of the state not only to facilitate life, liberty, and the pursuit of happiness, but to protect us from ourselves… Every time the student who took the absolute moral position would make her case, Erik would counter. She would say, ‘Anything that changes your body chemistry and your emotional state and your perception of reality shouldn’t be allowed, and is bad, and could be abused.’ And Voorhees — this is more of an example than what he actually said — he would say, ‘Well, what about coffee?’ and she would pause and say, ‘What about coffee?’ “Well, coffee has caffeine, it’s a stimulant; coffee can change your perception of time, it can change your mood, it can make you agitated, it can calm you down, depending on how it influences you.’ And she paused and he said, ‘What about cold medicine? Should that be illegal? Should that be tightly controlled? Should that be a Schedule I drug?’… Every time she would make a point he would make a little needle of an argument, deflating the thesis she had built. And that’s, in my mind, very demonstrative of who Erik was.”
Voorhees’s main takeaway from the class was not the depth of human depravity, as evidenced by the perennial existence of black markets — by, for instance, the poaching of animals and the exploitation of the poor. However much he abhorred violence, what stuck with him was the immense scale of the economic activity taking place in the shadows. And then, too, he found the actual mechanisms of the illicit economy worth thinking about. Black and gray markets rely on cash and can only exist because cash exists. But cash is difficult to transport across borders, keeping much of the shadow economy confined to specific geographical regions. Years later, he was struck by the fact that Bitcoin could function like cash while allowing transnational payments. He foresaw the expansion of the illicit economy into the digital realm. “Now the gray market can operate beyond the bounds of anyone’s community,” he says. Mark Williams, a lecturer in finance at Boston University, agrees: “A black market that can exist on fiat currency will only multiply on virtual currency if unchecked.” The tide of history was perhaps on Voorhees’s side. In 2014, both Washington and Colorado passed laws legalizing marijuana for recreational use.
Even outside of class requirements, Cary found himself reading deeply in politics and economics, though his classical liberal tendencies never shaded, as Voorhees’s did, into extreme libertarianism. Nevertheless, they agreed more than they disagreed, making them brothers-in-arms. “With UPS being such a liberal bastion,” Cary says, “we were in battle constantly, debating people on politics, economics, religion, science, everything.” Iron sharpened iron. But there was a key difference between them. If Voorhees was a crusader, Cary was a pragmatist.
From Burnout to Bitcoin
Cary wound up spending most of his twenties working for a software start-up called Pipeline Deals, which required him to move — “with one box and a duffel bag” — from Washington to the East Coast. “I had run out of money, basically,” Cary explains. “I moved to Westchester, Pennsylvania, on a handshake. The role was very simple; I got a one-line email about it. My job description was to ‘grow the company’ … So, what did that mean? It meant everything. I was the janitor. I was the tax guy. I did our product management; I did our sales; I did our customer service; I did design. Everything.” Cary thrilled to the challenge. He was like a tightrope walker working without a safety net, who knew only that he needed to cross the chasm by whatever means necessary. Armed with this simple mandate — and paired with a developer — he flourished; within six months, the company’s founders had made him a partner in the business at the age of twenty-two. “For me, that was a huge endorsement,” Cary says. “I didn’t really care about the money. I cared about the acknowledgment.”
He had once envisioned working for a big software company like Amazon or Microsoft — he felt called to management — but the interviews he went on after college failed to inspire him. He didn’t want a long slow climb up the ladder; he wanted a rapid ascent. That was why he had taken the job at Pipeline Deals. For the next four years, he was married to his job — addicted to the nonstop work, the high stakes, the rapid pace. For four years he took not a single vacation day. He saw the company through its adolescence. But by the end of four years, he was getting restless. After his “tour of duty” in Westchester, he moved back to Seattle, but there, too, he was dissatisfied. This dissatisfaction was eternal with him, a “grass-is-greener-on-the-other-side thing,” as he puts it, that made him a perpetual nomad, always hungry for the next horizon. “It’s one of the things that makes me pretty successful,” he says, “but it’s also one of the things that makes me really hard to live with because I’m just going to constantly want to blow up something and change it and do something new.”
Not long after returning from Tokyo, six and a half years after he’d accepted a position at Pipeline Deals, he sat his bosses down and told them he was tired. At first, they didn’t know what to make of it. Cary was their star employee. His work ethic was unparalleled. What do you mean, you’re tired? “I’m really tired,” he told them.
Granted a three-month sabbatical, Cary headed to Morocco, where his sister, Tatiana, was stationed with the Peace Corps. Though he jokes that his family members get along better when living on separate continents, at this moment he needed his sister’s calming influence, needed to absorb, as if by osmosis, her “even-keeled, Hakuna Matata attitude.” Cary, a born traveler, enters deeply into the places he visits, and Morocco was no exception. (Later, he took with him everywhere a laptop decorated with a yellow sticker bearing the word ESSAOUIRA — the name of a town on Morocco’s Atlantic coast where he’d spent time.) Even so, he couldn’t help but think back to Tokyo — and to Roger Ver’s offer. There was ample cause for reflection. A mysterious chain of cause and effect seemed to be at work. It was a weekend the previous summer that had prepared him to hear Ver’s pitch as the opportunity it was.
After graduating in 2007, Cary and Voorhees had gone their separate ways — Voorhees to Dubai, where he hoped in vain to make his fortune, arriving just in time to watch the property boom grind to a halt, and Cary to India, where he spent four months in what he describes as “an incredibly rural area, where the poorest people on the planet live,” teaching English to rural Dalits — the so-called “untouchables” who fall outside the fourfold Hindu caste system and are discriminated against at every level of Indian society. But the two men remained close; they had stayed in touch since college, had followed one another’s budding careers, and once a year they reunited — with a dozen other college friends, mostly fraternity brothers. “We just pick a new spot in the United States somewhere and everyone flies in and we have a crazy weekend,” Cary explains. In the summer of 2012, Voorhees was moving to New York to take a job at BitInstant, one of the most promising early Bitcoin startups, and Cary invited his friend to stay with him for a couple of days at a small beach house owned by relatives on Long Island’s North Fork. While they fished for flounder in the Long Island Sound, Voorhees, thrilled with his new position, talked nonstop about Bitcoin.
“For forty-eight hours, we’re roasting in the sunshine, I’m plucking out fish from the water, and he’s just constantly going on and on and on about it,” Cary says. “It was like he’d had a religious experience. It was exhausting. We’re on this little tiny dinghy with a shit motor — one of those ones that never starts, you know, and it’s leaking, and he’s talking to me about the future of finance, the Internet for money, how it’s going to change everything, digital property rights systems. He’s like, ‘Nic, this is the perfect form of money, and here are the reasons why.’ I was like, ‘Whew! Well, all right, maybe I should invest some of my money in Bitcoin.’”
Being unable to shut up about Bitcoin “was my affliction ever since I found out about it,” Voorhees admits. “I’m not going to talk about the weather or superfluous stuff when there’s this world-changing technology that I’ve discovered.” (He now serves as CEO of ShapeShift, a cryptocurrency exchange service that emulates Blockchain’s commitment to user privacy and recently raised $10.4 million of venture capital in a Series A round.) Impressed by his friend’s passion, Cary bought some bitcoins through BitInstant on three occasions, when the price was $7, $9, and $13 respectively. At the time, he was earning an annual salary of about $40,000. The most he will say when asked about the value of his bitcoins is that he spent a four-figure amount to acquire them. He stored them in a Blockchain wallet for safe keeping. But even then, he didn’t see his cache of digital currency as a serious investment. It was a vote of confidence in a friend. “You know when you’ve got a buddy who’s, like, a really big sports fan in Denver, so you buy the Broncos jersey? That’s what it felt like to me,” he says.
A year went by burnout, Tokyo, sabbatical. The more he thought about it, the more Cary found Bitcoin irresistible, the “perfect confluence” of things he was passionate about economics, politics, technology. Like Voorhees two years earlier, Cary decided to throw himself into it with all his heart and mind. “To have those three things come together in an opportunity to participate in changing the world,” he says, “for me was like, ‘Oh my God. I’m going to dedicate everything I can to this.’” Roger Ver had found his man.
Alan Zibluk Market Hive Founding Member