By Nathaniel Popper
A delegation of American executives flew to Beijing in April for a secret meeting just blocks from Tiananmen Square. They had come to court the new kingmakers in one of the strangest experiments in money the world has seen: the virtual currency known as bitcoin.
Against long odds, and despite an abstruse structure, in which supercomputers “mine” the currency via mathematical formulas, bitcoin has become a multibillion-dollar industry. It has attracted major investments from Silicon Valley and a significant following on Wall Street.
Yet bitcoin, which is both a new kind of digital money and an unusual financial network, is having something of an identity crisis. Like so many technologies before it, the virtual currency is coming up against the inevitable push and pull between commercial growth and the purity of its original ambitions.
In its early conception, bitcoin was to exist beyond the control of any single government or country. It would be based everywhere and nowhere.
Yet despite the talk of a borderless currency, a handful of Chinese companies have effectively assumed majority control of the bitcoin network. They have done so through canny investments and vast farms of computer servers dispersed around the country. The U.S. delegation flew to Beijing because that was where much of the bitcoin power was concentrated.
At the time of the meeting, held at the Grand Hyatt hotel, more than 70 percent of the transactions on the bitcoin network were going through just four Chinese companies, known as bitcoin mining pools — and most flowed through just two of those companies. That gives them what amounts to veto power over any changes to the bitcoin software and technology.
China has become a market for bitcoin unlike anything in the West, fueling huge investments in server farms as well as enormous speculative trading on Chinese bitcoin exchanges. Chinese exchanges have accounted for 42 percent of all bitcoin transactions this year, according to an analysis performed for The New York Times by Chainalysis. Just last week, the Chinese internet giant Baidu joined with three Chinese banks to invest in the U.S. bitcoin company Circle.
But China’s clout is raising worries about bitcoin’s independence and decentralization, which was supposed to give the technology freedom from the sort of government crackdowns and interventions that are commonplace in the Chinese financial world.
“The concentration in a single jurisdiction does not bode well,” said Emin Gun Sirer, a professor at Cornell University and a bitcoin researcher. “We need to pay attention to these things if we want decentralization to be a meaningful thing.”
The power of Chinese companies has already come to play a major role in a civil war that has divided bitcoin followers over the last year and led to the departure of one of the top developers of the virtual currency. The dispute has hinged on technical matters as well as on bigger questions of what bitcoin should look like in 10 or 20 years.
The U.S. companies whose executives journeyed to the Grand Hyatt — including venture-capital-funded startups like Coinbase and Circle — are fighting to make bitcoin bigger. They hope to expand the capacity of the bitcoin network so that it can process more transactions and compete with the PayPals and Visas of the world.
The current size of the network goes back to the early days, when bitcoin’s founder, Satoshi Nakamoto, limited the amount of data that could travel through the network, essentially capping it at about seven transactions a second. As bitcoin has grown more popular, those limits have caused severe congestion and led to lengthy transaction delays.
The U.S. delegation in China had a software proposal, known as bitcoin Classic, that would change all that.
The Chinese companies, though, had the ultimate decision-making power over any changes in the software, and they did not agree with the American delegation. The Chinese had thrown in their lot with another group of longtime programmers who wanted to keep bitcoin smaller, in part to keep it more secure. The Americans hoped to persuade the Chinese to switch sides.
In a hotel conference room, the U.S. team of about a half-dozen people cycled through its PowerPoint slides, in English and Chinese, arguing for expansion of the network, most notably pointing to the long delays that have been plaguing the system as a result of the congestion. The Chinese representatives listened and conferred among themselves. The group took a break for a lunch of lamb and dumplings at a nearby mall.
“We kept coming back and saying, ‘For better or worse, you have this leadership in the industry, and everyone is looking to you to show some leadership,'” said Brian Armstrong, chief executive of Coinbase.
Ultimately, Armstrong said, “We were unable to convince them.”
Some bitcoin advocates have complained that the Chinese companies have been motivated only by short-term profit, rather than the long-term success and ideals of the project. Bobby Lee, chief executive of the bitcoin company BTCC, which is based in Shanghai, bristled at that — and at the notion that the Chinese companies represent any sort of united front. He attended the April meeting and pointed out that the Chinese companies had disagreed among themselves on how urgent it was to make changes to the bitcoin software.
He said the American companies failed to understand the power dynamics in the room that day. “It was almost like imperialistic Westerners coming to China and telling us what to do,” Lee said in an interview last week. “There has been a history on this. The Chinese people have long memories.”
A Mining Powerhouse
The mysterious creator of bitcoin, Satoshi Nakamoto, released the software in early 2009. It was designed to provide both a digital coin and a new way to move and hold money, much as email had made it possible to send messages without using a postal service.
From the beginning, the system was designed to be decentralized — operated by all the people who joined their computers to the bitcoin network and helped process the transactions, much as Wikipedia entries are written and maintained by volunteers around the world.
The appeal of a group-run network was that there would be no single point of failure and no company that could shut things down if the police intervened. This was censorship-free money, bitcoin followers liked to say. Decision-making power for the network resided with the people who joined it, in proportion to the computing power they provided.
The allure of new riches provided the incentive to join: Every 10 minutes, new bitcoins would be released and given to one of the computers helping maintain the system. In the lingo of bitcoin, these computers were said to be mining for currency. They also served as accountants for the network.
For the first few years, aside from its use as a payment method on the Silk Road, an online drug market that has since been shut down, bitcoin failed to gain much traction. It burst into the world’s consciousness in 2013 when the price of the digital money began to spike, in no small part because Chinese investors began trading bitcoins in large numbers.
Lee said the Chinese took quickly to bitcoin for several reasons. For one thing, the Chinese government had strictly limited other potential investment avenues, giving citizens a hunger for new assets. Also, Lee said, the Chinese loved the volatile price of bitcoin, which gave the fledgling currency network the feeling of online gambling, a very popular activity in China.
There has been widespread speculation that Chinese people have used bitcoin to get money out of the country and evade capital controls, but Lee and other experts said the evidence suggests this is not a significant phenomenon.
“No Chinese person is pushing for bitcoin because it’s libertarian or because it’s going to cause the downfall of governments,” said Lee, who moved to China after growing up in Africa and the United States and studying at Stanford University. “This was an investment.”
The extent of the speculative activity in China in late 2013 pushed the price of a single bitcoin above $1,000. That surge — and the accompanying media spotlight — led China’s government to intervene in December 2013 and cut off the flow of money between Chinese banks and bitcoin exchanges, popping what appeared to be a bitcoin bubble.
The frenzy, though, awakened interest in another aspect of the currency: bitcoin mining.
Peter Ng, a former investment manager, is one of the many people in China who moved from trading bitcoins to amassing computing power to mine them. First, he mined for himself. More recently he has created data centers across China where other people can pay to set up their own mining computers. He now has 28 such centers, all of them filled with endless racks of servers, tangled cords and fans cooling the machines.
Ng, 36, said he had become an expert in finding cheap energy, often in places where a coal plant or hydroelectric dam was built to support some industrial project that never happened. The bitcoin mining machines in his facilities use about 38 megawatts of electricity, he said, enough to power a small city.
The people who put their machines in Ng’s data centers generally join mining pools, which smooth the financial returns of smaller players. A popular one, BTCC Pool, is run by Lee’s company. This month it attracted about 13 percent of the total computational power on the bitcoin network. The most powerful pool in China — or anywhere in the world — is known as F2Pool, and it had 27 percent of the network’s computational power last month.
The Politics of Pools
Big pool operators have become the kingmakers of the bitcoin world: Running the pools confers the right to vote on changes to bitcoin’s software, and the bigger the pool, the more voting power. If members of a pool disagree, they can switch to another pool. But most miners choose a pool based on its payout structure, not its bitcoin politics.
It was his role overseeing BTCC Pool that got Lee invited to the meeting with the American delegation in Beijing. The head of operations at F2Pool, Wang Chun, was also there.
Perhaps the most important player in the Chinese bitcoin world is Jihan Wu, 30, a former investment analyst who founded what is often described in China as the world’s most valuable bitcoin company. That company, Bitmain, began to build computers in 2013 using chips specially designed to do mining computations.
Bitmain, which has 250 employees, manufactures and sells bitcoin mining computers. It also operates a pool that other miners can join, called Antpool, and keeps a significant number of mining machines for itself, which it maintains in Iceland and the United States, as well as in China. The machines that Bitmain retains for itself account for 10 percent of the computing power on the global bitcoin network and are enough to produce new coins worth about $230,000 each day, at the exchange rate last week.
Wu and the other mining pool operators in China have often seemed somewhat surprised, and even unhappy, that their investments have given them decision-making power within the bitcoin network. “Miners are the hardware guys. Why are you asking us about software?” is the line that Ng said he often hears from miners.
This attitude initially led most Chinese miners to align themselves with old-line bitcoin coders, known as the core programmers, who have resisted changing the software. The miners wanted to take no risks with the money they were minting.
But lately, Wu has grown increasingly vocal in his belief that the network is going to have to expand, and soon, if it wants to keep its followers. He said in an email last week that if the core programmers did not increase the number of transactions going through the network by July, he would begin looking for alternatives to expand the network.
However the software debate goes, there are fears that China’s government could decide, at some point, to pressure miners in the country to use their influence to alter the rules of the bitcoin network. The government’s intervention in 2013 suggests that bitcoin is not too small to escape notice.
Wu dismissed that concern. He also said that as more Americans buy his Bitmain machines and take advantage of cheap power in places like Washington state, mining will naturally become more decentralized. Already, he said, 30 to 40 percent of new Bitmain machines are being shipped out of China.
For now, though, China remains dominant.
“The Chinese government normally expects its businesses to obtain a leading role in emerging industries,” he said. “China’s bitcoin businesses have achieved that.”