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In April, an American delegation visited Beijing for secret talks at the Grand Hyatt Hotel, a few blocks from Tiananmen Square.
They were off to meet some new god-makers—the greatest and strangest monetary experiment ever seen: the virtual currency Bitcoin.
Despite its unequal stakes and esoteric structure (supercomputers are used to mine the currency by calculating mathematical functions), Bitcoin has become a multibillion-dollar industry, attracting heavy investments from Silicon Valley and, in its wake, Wall Street.
But Bitcoin itself, as an emerging electronic currency and unprecedented financial network, is experiencing something of an identity crisis. Like many technologies before it, this virtual currency is inevitably being torn between the needs of commercial growth and the purity of its original vision.
In the original vision, Bitcoin should not be controlled by any single government or country. It is both ethereal and ubiquitous.
But aside from the discussion of borderless currencies, some Chinese companies already effectively control large parts of the Bitcoin network. They have achieved this control through savvy investments and giant computer mining farms scattered across the country. The US delegation went to Beijing precisely because it is the power center of Bitcoin.
At the time of the meeting, more than 70% of all bitcoin transactions took place through four Chinese companies, known as bitcoin mining pools — most of which flowed through just two companies. This gave them proportional veto power over changes to bitcoin software and technology.
China has become the No. 1 Bitcoin market, surpassing any Western country, with mining farms and speculative trading on Chinese Bitcoin exchanges attracting huge investments. According to an analysis by the New York Times Chainalysis, Chinese exchanges account for 42% of all Bitcoin transactions this year. Last week, Chinese Internet giant Baidu joined three other Chinese banks in investing in the U.S. Bitcoin company Circle.
But China’s influence has raised concerns about the independence and decentralized nature of Bitcoin, a technology that is supposed to be immune to the kind of government clampdowns and meddling that are common in China’s financial markets.
“Centralization in a single jurisdiction is not a good sign,” said Emin Gun Sirer, a professor at Cornell University and a bitcoin researcher. “If decentralization is still meaningful, we should pay attention to it.”
The power of Chinese companies is giving them a major role as a civil war roiled the bitcoin community last year, dividing its followers and leading to the departure of a top developer. The debate hinges on technical details but also on larger questions about what bitcoin should look like in 10 or 20 years.
The American companies visiting the Grand Hyatt — including venture-backed startups like Coinbase and Circle — are working to make Bitcoin great again. They hope to expand the capacity of the Bitcoin network so it can handle more transactions and compete with PayPal and Visa.
The current network capacity is from the early days when Bitcoin creator Satoshi Nakamoto limited the amount of data flowing through the network, essentially creating a bottleneck of 7 transactions per second. As Bitcoin has become more popular, these restrictions have led to severe congestion and lengthy transaction delays.
The U.S. delegation brought with it a software proposal, called Bitcoin Classic, that would change that.
But the Chinese companies, which make the final decisions about software changes, disagreed with the American companies. China has bet on another group of long-time developers who want to keep Bitcoin small in the hope of maintaining security. The American companies hope to persuade the Chinese to change sides. In the hotel conference room, the American delegation of about six people kept showing PowerPoints, switching back and forth between English and Chinese, seeking to expand the network, and they emphasized that long transaction delays caused by network congestion were spreading like a plague. The Chinese companies listened and negotiated internally. They stopped to eat at the mall next door, and had lamb and dumplings for lunch.
“We’ve said many times, ‘For better or worse, you are the leaders of this industry and everyone is counting on you to show leadership,’ ” said Brian Armstrong, CEO of Coinbase.
In the end, Mr Armstrong said: “We were not able to convince the other side.”
Some bitcoin advocates complain that Chinese companies are focused on short-term profits, ignoring long-term success and the vision of the project. Li Qiyuan, CEO of Shanghai-based bitcoin company BTCC, is incensed by this — especially the idea that Chinese companies have any united front. He attended the April meeting and noted that there is no consensus among Chinese companies on the urgency of changing the bitcoin software.
He said the American company failed to recognize the power dynamics in the room that day. “It was like the imperialist Western devils came into the village and gave us orders,” Mr. Li said in an interview last week. “There is a history of Westerners doing this, and the Chinese people still remember it.”
The software, released by Bitcoin's mysterious creator Satoshi Nakamoto in early 2009, was designed to provide both an electronic currency and a new way to transfer and store money, much as email did to freeing up the postal service for sending messages.
The system was designed from the beginning to be decentralized - run by all users who join the Bitcoin network and help process transaction information, just as Wikipedia is written and maintained by volunteers around the world.
The benefit of a network run by a group of people is that there is no central node that can fail, and no company can shut everything down if the police intervene. Bitcoin's followers like to describe it as a currency that is immune to censorship. Decision-making power over the network depends on the proportion of computing power contributed by those who join the network.
The desire to become newly wealthy provides ample economic incentive: Every 10 minutes, new bitcoins are created and distributed to computer nodes that maintain the system. In bitcoin jargon, these computers are “mining.” They also act as accountants.
After initially gaining little attention, except as a payment option on the now-defunct Silk Road, the online drug black market, Bitcoin suddenly captured the world’s attention in 2013, with a surge in price, largely because Chinese investors began trading large amounts of the currency.
Mr. Li said there are several reasons why Chinese people have been so quick to embrace Bitcoin. First, the Chinese government’s tight controls on other potential investment avenues have left citizens hungry for new assets. Second, Mr. Li said, Chinese people like Bitcoin’s price volatility, which can provide a thrill similar to online gambling, which is very popular in China.
There are widespread rumors that Chinese people use Bitcoin to flee their capital and avoid capital controls, but Mr. Li and other experts believe that this phenomenon is not significant.
“No Chinese person chose Bitcoin because it’s libertarian or because Bitcoin can overthrow the government,” said Li, who grew up in Africa and the United States and attended Stanford before moving to China. “It’s an investment.”
Speculation in Bitcoin in China peaked in late 2013, pushing the price of a single bitcoin to over $1,000. This surge — and the media coverage of it — led the Chinese government to intervene in December 2013, cutting off Chinese banks’ access to Bitcoin exchanges, which could be considered the bursting of the Bitcoin bubble.
But this has spurred interest in another aspect of bitcoin: bitcoin mining.
Peter Ng, a former investment bank manager, is one of many who have switched from trading bitcoin to mining its computing power. First, he mined for himself. More recently, he has set up data centers across China where others can pay him to build their own mining machines. He now owns 28 of these data centers, all filled with countless servers, tangled cables and cooling fans.
Mr. Ng, 36, said he had become an expert at unearthing cheap energy, often from coal-fired or hydroelectric plants built to support projects that never got off the ground. He said the bitcoin mining machines at his facility use about 38 megawatts of power, enough to power a small city.
People who put machines in Mr. Ng’s data centers often join mining pools, which offer optimized financial returns to small players. Mr. Li’s company runs a popular mining pool, BTCC Pool. This month, it attracted about 13% of the Bitcoin network’s computing power. China’s most powerful mining pool — and the most powerful in the world — F2Pool, which controls 27% of the network’s computing power, as of this month.
Large mining pool operators have become the gods of the Bitcoin world: operating a mining pool can gain voting rights on changes to the Bitcoin software, and the larger the mining pool, the greater the voting power. If members of a mining pool object, they can move to another mining pool. But most miners choose mining pools based on the profit structure and do not mind Bitcoin political issues.
It was his role as regulator of BTCC Pool that got Mr. Li invited to the meeting in Beijing. F2Pool’s boss, Wang Chun, was also present.
Perhaps the most important player in the Chinese bitcoin world is 30-year-old Jihan Wu, a former investment bank analyst who founded what is widely considered the world’s most valuable bitcoin company. Bitmain began making mining machines in 2013 using chips designed and manufactured specifically for mining calculations.
Jihan Wu, CEO of Bitmain, Bitcoin evangelist Bitmain currently employs 250 people, who make and sell Bitcoin mining equipment, operate mining pools that other miners can join, namely AntPool, but also keep a large number of mining machines for themselves, running in Iceland, the United States and China. The mining machines reserved by Bitmain for itself account for 10% of the total network computing power, which is enough to produce $230,000 worth of new Bitcoin every day at this week's exchange rate.
Mr. Ng and other Chinese mining pool operators seemed a little surprised, even unhappy - their investment gives them decision-making power in the Bitcoin world. "Miners are hardware players. Why are you asking us software questions?" Mr. Ng said he often heard miners ask this question.
This attitude initially led most Chinese miners to align themselves with veteran Bitcoin programmers, the Core team, who refused to change the software. Miners did not want to risk their hard-earned money.
But lately, Wu has become increasingly vocal about the need for the network to scale, and quickly if it is to retain a following. He said in an email this week that if the Core team can’t deliver on the increased transaction count by July, he will look for alternatives to do the work. But regardless of how the debate over the software plays out, the fear of the Chinese government suddenly pressuring domestic miners to use their influence to change the rules of the bitcoin network persists. As its intervention in 2013 showed, bitcoin isn’t small enough to slip away from its eyes.
Wu shrugged it off. He also said that as more Americans buy his mining machines and take advantage of cheap electricity in places like Washington State, mining will naturally become more decentralized. He said that 30-40% of new Antminers are already being exported outside of China.
But for now, China still dominates.
“The Chinese government generally expects domestic companies to take the lead in emerging industries,” he said. “China’s bitcoin industry has already fulfilled that expectation.” |
