Ten years ago, a mysterious computer programmer invented a new type of money that wasn’t backed by any government or kept in any bank. There were no coins or bills, just long strings of letters and numbers stored inside a network of computers that anybody could be a part of by downloading some free software over the Internet. Today that computerized currency, bitcoin, is well-known, though little understood, and bitcoin’s popularity has inspired the creation of thousands of other types of digital money, known as “cryptocurrency.” Over the last decade, you could have made a five million percent profit by investing in cryptocurrency. Or you could have lost everything. It has been a wild ride, and few people have experienced the highs and lows more than a 29-year-old named Charlie Shrem.
Charlie Shrem: I felt like I was riding a rocket ship that had no mission control. You were going up very quickly. But we were not thinking about what would happen when eventually we have to go back down? And, for me, I dealt with the ultimate going back down.
Anderson Cooper: You crashed hard?
Charlie Shrem: Crashed really hard.
Charlie Shrem was once described as the last kid who’d be picked for a game of dodgeball, but he always felt comfortable around computers. He grew up in a Syrian Jewish community in Brooklyn, New York and was a senior at Brooklyn College when, in 2011, he started a business in his parent’s basement. He called it “BitInstant,” because it enabled people to buy bitcoin quickly, using dollars, at a time when interest in the computerized currency was just starting.
Anderson Cooper: When did you first notice the business taking off?
Charlie Shrem: Almost instantly. The business–
Anderson Cooper: That– really, (LAUGH) that fast?
Charlie Shrem: I had $1,000 that I threw into it, that was my own money. And then within days it was getting crazy. And I had my bar mitzvah money that I wanted to use. (LAUGHTER)
Within a year, Tyler and Cameron Winklevoss of Facebook fame became major investors in Charlie’s company. By 2013, he was pronounced one of bitcoin’s first millionaires. Estimates of his net worth ranged from a few million dollars to 45 million.
Charlie Shrem: I went from being a kid who had no self-confidence to the complete opposite, with a crazy ego. And I was doing, you know, media interviews every day and I was the evangelizer of the industry– the bitcoin Moses as they would call me.
Anderson Cooper: You go from being the last kid picked at dodgeball– to, you know…
Charlie Shrem: Running the team.
How did Charlie and other 20-somethings become kings of a new industry that deals in money you can’t deposit in the bank? To understand that, you have to go back to a time when confidence in banks had plummeted.
Shortly after the collapse of Lehman Brothers, during the financial crisis of 2008, this paper started circulating on the internet. It proposed creating an “electronic cash system” that would allow people to pay one another online “without going through a financial institution.” To this day, no one has the faintest idea who the paper’s author, “Satoshi Nakamoto” is. But he, or she, or they, created ingenious software that anyone in the world could download onto their computer for free.
The computers running the bitcoin software were then able to work together over the internet and perform functions normally handled by banks, like keeping accurate records and guarding against fraud.
The computers maintain a constantly updated record of transactions involving bitcoin. The record is called the “blockchain,” and it’s how the network keeps track of who owns what.
One of the most innovative features of the system is that every computer on the network can keep a copy of this record showing every transaction ever recorded.
Neha Narula: The blockchain’s stored on thousands of computers around the world.
Neha Narula is the director of the Digital Currency Initiative at the MIT Media Lab.
Neha Narula: The idea behind the blockchain is that it’s everywhere. And everyone can look at it and verify it for themselves. And so what this means is that you get this sense of trust. You get this sense of security because everyone’s watching.
If you’re wondering what there is to watch, here it is. Bitcoin’s not much to look at, just letters and numbers.
Anderson Cooper: Why would people have trust in something that is just numbers and letters? It doesn’t have anything backing it up.
Neha Narula: I think to answer that question, you really have to go back to sorta the roots of money and what is money. The reason that the $5 bill in my wallet has value is because I know you’ll take it from me for something. I can buy a sandwich from you with that $5 bill.
Anderson Cooper: So it has value because people believe in it?
Neha Narula: Exactly. And that’s it. That’s really it.
At first, bitcoin was just an interesting experiment conducted at home by computer programmers like Laszlo Hanyecz. Because his computer was one of those computers helping to maintain the bitcoin network, Satoshi Nakamoto’s software rewarded Hanyecz with some bitcoin. But there wasn’t much he could do with it back in 2010. So he went on an internet chat forum and asked whether anyone would be willing to buy him some pizza in exchange for 10,000 bitcoin.
Laszlo Hanyecz: And somebody there said, “Hey, I’ll– you know, I’ll take you up on that offer.” Here you can see the original pizzas. And that’s my daughter’s hand. She was a year old.
That pizza obtained with bitcoin by Laszlo Hanyecz and enjoyed by his daughter nine years ago is believed to be the first real-world transaction involving cryptocurrency.
Anderson Cooper: Do you feel like, after that that that changed people’s perception of it, in a way?
Laszlo Hanyecz: I think it– it made it real for some people. I mean it certainly did for me.
In the years that followed, bitcoin caught on. Some merchants started accepting it, and it became possible to buy and sell bitcoin for dollars through businesses called exchanges. As the market price of one bitcoin rose from zero to a dollar to $100 and more, an esoteric experiment grew into a global industry.
On a wind-swept plain in Iceland, these warehouses are closely guarded at all times. We were asked not to disclose their exact location.
This is one of the places where the records, the “blockchains,” of crytocurrencies are now kept. State-of-the-art computers work 24/7, performing calculations that safeguard the records. In industry lingo, this is called a “mine.”
Anderson Cooper: This does not look like any mine I’ve ever been in.
Marco Streng: Yes. Now this is a– mine of a new world. This is the new gold mine
Marco Streng is the CEO of a company called Genesis Mining.
Marco Streng: So there’s tens of thousands of processing units in here. And if you add all the computing power of all the processing units together, you have more than the world’s number one supercomputer.
Back in New York, by 2013 Charlie Shrem had finally moved his company’s computers out of his parents’ basement. He was spending a lot of time travelling to industry conferences and talking up bitcoin.
Charlie was charismatic.
Charlie was funny.
But could charlie be trusted to run a business?
In a new book, “Bitcoin Billionaires,” Ben Mezrich describes how BitInstant’s biggest investors, the Winklevoss twins, grew concerned that their young CEO was spending too much time travelling and partying and not paying enough attention to the details of running his company. For example: Charlie knew the U.S. government was concerned about how cyber-thieves and money-launderers were using bitcoin. His company was required to monitor its customers and report any suspicious activity. Banks have whole departments that are supposed to do this. The person at BitInstant who Charlie put in charge of it, was Charlie.
Anderson Cooper: So you were in charge– of making sure that you complied with– with rules and regulations for financial transaction–
Charlie Shrem: Yes.
Anderson Cooper: Was that a good idea?
Charlie Shrem: No. (LAUGHTER) Very bad idea.
In 2013, Charlie had other problems too. A documentary called “The Rise and Rise of Bitcoin,” showed what happened when the price of bitcoin rapidly rose and fell. Charlie’s company and an exchange it did business with couldn’t keep up with customer’s orders.
Charlie Shrem in “The Rise and Rise of Bitcoin”: People can’t buy and sell, and they can’t withdraw, and they can’t deposit, the whole thing is just a fritz.
BitInstant went out of business in July 2013, a victim of bitcoin’s volatile landscape and Charlie’s many mistakes.
Charlie Shrem: I look back at myself and I say, “I don’t even know if I would do business with myself.”
Anderson Cooper: Essentially you’re saying you couldn’t be trusted then?
Charlie Shrem: 100%.
Six months later, in January 2014, he was returning from a trip abroad when he got stopped at passport control in Kennedy Airport.
Charlie Shrem: I got surrounded and– by– a whole pupu platter of federal agents. And–
Anderson Cooper: A pupu (CHUCKLE) platter—of federal agents
Charlie Shrem: Yeah, like all mixtry of D.E.A., I.R.S.– N.Y.P.D., J.F.K. security– you had all of ’em
Federal agents had evidence that Charlie knew one of his customers was buying bitcoin and then re-selling it on a website where it was used to buy illegal drugs.
Charlie Shrem: When I got arrested, the first thing I told my lawyer is, “I’m guilty. Let’s make a deal.” Because I knew immediately that I had done what they said I did.
One of bitcoin’s first millionaires was now one of its first felons. But that didn’t stop the market price of bitcoin from rising from about $250 when Charlie went to prison in 2015 to nearly 20,000 dollars at the end of 2017. It then plunged 84% before climbing back to more than $8,000 this past week.
Remember: a bitcoin was worth less than a penny when Laszlo Hanyecz first traded bitcoin for pizza nine years ago. We calculated that if Hanyecz had held onto all the bitcoin he used back then to get various items, much of it pizza, by the time of our interview those bitcoins would have been worth…
Anderson Cooper: $800 million.
Laszlo Hanyecz: Yeah.
Anderson Cooper: So– okay. (CHUCKLE) Sorry, let me just get this straight. You spent about $800 million on pizza?
Laszlo Hanyecz: Well, if you look at today’s exchange rate.
Anderson Cooper: Are there nights you wake up, like, in a cold sweat, where– you– (CHUCKLE) think– “I could have had 800 million dollars if I hadn’t bought those pizzas?”
Laszlo Hanyecz: I think thinking like that is– is not really good for me.
There’s a long list of financial leaders who think bitcoin’s not good for anyone. Lael Brainard, one of the governors of the Federal Reserve, agreed to speak with us because she wanted to make sure ordinary investors understand the risks of cryptocurrency.
Anderson Cooper: There are people who say that cryptocurrency– it’s better than real currency because it’s not controlled by any government and it means it’s not subject to manipulation by central bankers like you, no offense.
Lael Brainard: The U.S.– currency has a whole set of legal protections around it. The federal reserve and ultimately the U.S. treasury stand behind it. And when you hold your dollars in a bank account, you have deposit insurance.
Anderson Cooper: And that doesn’t exist with cryptocurrencies?
Lael Brainard: None of those accountability mechanisms exist– for bitcoin.
Charlie Shrem spent a year in prison. When he got out, the man once described as “Bitcoin Moses” worked in a restaurant, parting seas of dirty dishes for $8 an hour. But like bitcoin, Charlie Shrem bounced back.
Three years after getting out of prison, he’s living very comfortably in Florida. He told us he’s made money blogging, consulting, and investing in cryptocurrency and is now captain of his own destiny. He’s even got a boat he named “Satoshi,” after bitcoin’s mysterious creator.
After watching this, you may be wondering why the world needs cryptocurrencies. Neha Narula of MIT’s digital currency initiative argues they can make a difference.
Neha Narula: The thing that excites me about cryptocurrencies is that we can experiment with the transfer of value. We can put new features into money. We can change the way money works.
She says cryptocurrency has already helped people in countries like Venezuela where the monetary system is in crisis. And in the future it may be able to do things like speed up and lower the cost of worldwide money transfers.
Neha Narula: People used to say, “Why do we need email? I can just call someone on the phone. And now, we can’t live without it.
Anderson Cooper: So this is one of those conversations that 20 years from now, someone could replay, and have a good laugh because I’m asking such moronic questions that will be so obvious to everybody?
Neha Narula: Or they’ll be laughing at me because I said cryptocurrencies were gonna be a thing and they totally flamed out and died.
Anderson Cooper: It still could go either way.
Neha Narula: It could really go either way. It’s– that’s what makes it so exciting and interesting.
Produced by Andy Court and Evie Salomon
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