New Money: S.F. is Leading the Digital Currency Trend. But Will it Become a Revolution?

Illustration by Audrey Fukuman

In 2009, Jered Kenna, a wiry former Marine with libertarian leanings, was spending a lot of time in cryptography chat rooms. One day a friend he'd made on one of the forums told him about a new all-digital currency called bitcoin. The friend, whom Kenna knew only by his user name, sent him 2,000 bitcoins to show him how it worked.

Kenna's friend gave him a code to create a secure, private address. Then he executed a command telling the open-source software that powers bitcoin to send 2,000 units to Kenna's address.

A demonstration of the power of belief: Bitcoin has migrated into the social contract, where it can be exchanged for cupcakes.
Photograph by Camila Bernal
A demonstration of the power of belief: Bitcoin has migrated into the social contract, where it can be exchanged for cupcakes.
Software developer Andrew Badr corrals local bitcoin users for regular meetups, where ideas and T-shirts are slung.
Courtesy of Andrew Badr
Software developer Andrew Badr corrals local bitcoin users for regular meetups, where ideas and T-shirts are slung.

Kenna confirmed the transaction and sent the coins back.

"I was like, 'Cool.' They were worthless," Kenna says. The value of the digital "coins" Kenna returned has since grown to more than $140,000.

Kenna never heard from his online friend again. Kenna believes in hindsight that he was part of bitcoin inventor Satoshi Nakamoto's inner circle — and since Satoshi Nakamoto is an invented name, many think the inner circle is Satoshi Nakamoto.

"I like to think of Satoshi as the Keyser Söze of bitcoin," Kenna says.

Kenna missed his first chance to strike it rich in bitcoin, but he's been hooked on the currency ever since. In 2011, he launched Tradehill, a bitcoin exchange that allowed users to change conventional currency into bitcoin and back again. It was forced to shut down briefly when it was left short in a dispute with a digital payments processor, but reopened this spring, just as bitcoin's value was starting to climb. Kenna says Tradehill now manages a "few million" dollars worth of bitcoin.

Kenna now inhabits a central place in the community of devotees that has grown up around bitcoin. Though international, the community is most robust in San Francisco, where legions of tech workers buy and exchange and, where they can, spend bitcoin. Kenna says that the Bay Area owns and exchanges a significant portion of the roughly $1 billion bitcoin economy.

Bitcoin gained some attention outside Kenna's circle of hardcore cryptography geeks in 2010 when Visa blocked card users from making donations to WikiLeaks, causing some to look to buy and donate bitcoins instead. But the currency really gained mainstream recognition only when its value shot up this spring. The spike coincided with the government of Cyprus' move to impose a new tax directly on citizens' bank accounts. More than a few Europeans, it seems, whisked their money into bitcoin accounts to safeguard it.

Even as mainstream interest in the currency grows, watchers are divided on whether it will be the innovation that triggers the next major revolution in the way people do business, or an egregious overreach by a booming tech industry that mistakes a figurative license to print money for a literal one.

It's no small feat to invent a new currency. The money has to reach a diverse set of prospective spenders. Its central authority must be powerful enough to withstand legal actions against it if — or, really, when — the currency is used for money laundering or other nefarious purposes. And, perhaps most importantly, it must survive the trip across that threshold of the social contract that separates play money from something with real-world value. Previous efforts to create a digital currency have foundered on these challenges.

The idea of a digital currency dates to the early days of the Internet, when it emerged as one way for people to exchange money online, which many users initially found terrifying. Most people eventually settled on credit card entry forms and PayPal, but hackers continued to look for a more streamlined digital solution. Bitcoin's founders also drew on hacker culture's dislike of government authority to create a currency that no government body controls.

Here's how it works. Anyone who wants bitcoin can put a computer to work for it: The open-source peer-to-peer software with which Kenna's friend sent him bitcoins pays out newly minted coins to the first machine to complete each of a series of periodic math challenges that are too difficult for a human — or a mere laptop — to handle. Competing at these challenges is called "mining." As more people mine for bitcoins, the challenges get progressively harder and increasingly require specialized computer hardware. Most San Francisco bitcoin enthusiasts interviewed bought bitcoins instead of mining it, the way one would use dollars to buy euros or gold.

Bitcoin works more like cash than a credit card, in that a transaction is irreversible and has no name attached to it. Small business owners and privacy nuts see these as perks. The software records all transactions in a public ledger, so they aren't completely untraceable, but they're more difficult to trace than credit card payments or wire transfers. The system confirms each payment with a number of computers on the network. It takes about 10 minutes. No neutral third party is needed mediate complaints, which makes the process cheaper and makes bitcoin a peer-to-peer network in human terms as well as technical.

The system appeals to investors because bitcoin is deflationary, which means one coin increases in value over time. The bitcoin software system will issue gradually smaller installments of bitcoin to miners until 2140, at which point production will end. Fiscal conservatives view inflation as a government-imposed tax, so they like the deflationary regime, too.

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"Next to the cavernous T-Mobile store at 20th and Mission sits an old single-resident occupancy building that was, until recently, a drug house. Its address is spray-painted on a piece of plywood spanning the doorway. Piles of rusted toilets that were removed and replaced crowd the hallways; most of the floor is unfinished... Dubbing it a "startup living community," he rents out each room for about $1,400 a month in a month-to-month arrangement — bitcoin accepted... One recent morning, the smell of eggs wafted from a communal kitchen as a line of the city's aspiring Mark Zuckerbergs stood, towel-clad, waiting to use the only working bathroom."

This perfectly encapsulates everything that's wrong with San Francisco.

mrericsir topcommenter

"The system appeals to investors because bitcoin is deflationary, which means one coin increases in value over time."

Not exactly.  There will be fewer mined as time increases, but that's not the same as deflation.  The value of 1 coin could easily decrease for a variety of other reasons.  For example if a better digital currency came along people might stop buying bitcoins, which would decrease their value.


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