What Is 21.co Really Building? An Excerpt From Digital Gold

Today we’re thrilled to offer an exclusive excerpt from Nathaniel Popper’s Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, the definitive book about bitcoin. In this chapter we learn, in detail, the secrets behind the mysterious 21.co. Originally called 21e6, the company grew in secrecy to become one of the highest capitalized bitcoin ventures in the world.

For much of the past two years, the Bitcoin company with the most money and high profile backers was one that almost no one knew existed.

With the arcane-sounding name 21e6, the company raised $70 million in 2013, with the initial investment coming in personal contributions from the elite of Silicon Valley, including Peter Thiel, David Sacks, Marc Andreessen and Ben Horowitz.

Founded by the Stanford wunderkind, Balaji Srinivasan and four co-founders, 21e6 proceeded to roll out thousands of computers that were built to do nothing but generate new Bitcoins – an energy intensive computational process referred to as mining.

The machines were loaded with custom-designed chips that had names like Yoda and Gandalf, and were submerged in a mineral oil solution that dispersed the incredible heat generated by the mining process.

The company ended up running up against the difficulty of making money in the cut-throat business of Bitcoin mining, which became much more difficult as the price of Bitcoin dropped over the last year.

This year, the company has renamed itself 21 Inc. and recently went public with a new fundraising round, that brought in another $56 million on top of the $70 million the company had already raised.

While the company has remained tight lipped about its intentions, it is shifting away from mining Bitcoins for itself and focusing more on distributing mining hardware to consumers with the aim of supporting broader adoption of the technology. But the company’s creation played an important role in Silicon Valley’s embrace of Bitcoin.

The startup began to form in early 2013, not long after Srinivasan had stepped away from the genetics startup, Counsyl, which he had founded in his Stanford dorm room and turned him into a local star.

Srinivasan had been tracking Bitcoin for some time, but with more time on his hands he began talking about how to create a company with Matt Pauker, a cryptographer who did a guest lecture in an engineering course that Srinivasan was teaching at Stanford.

They quickly saw the opportunity in Bitcoin mining. From the time Bitcoin was released in early 2009, computers trying to generate Bitcoins took part in a kind of computational lottery. The faster a computer could run numbers through a complex equation, known as a hash function, the more chances it had to win the lottery, and with it, a bundle of new Bitcoins.

By the end of 2012, Bitcoin enthusiasts at home had already found faster and faster ways to do the computations and win more Bitcoins with their existing computer hardware, generally using GPU computer chips made for processing graphics.

A few particularly ambitious engineers set out to build so-called ASIC computer chips that could be even more efficient – and designed specifically for Bitcoin mining. In early 2013 the first of these were deployed. Together, the joint computing power of all the machines connected to the Bitcoin network was equivalent to several super computers. It was these computers that were, in essence, securing the network.

But the people creating these early ASIC chips were relative amateurs, and Srinivasan thought he could do much better by harnessing some of the top minds in Silicon Valley. In addition to Pauker, he brought on as co-founders the experienced engineers Nigel Drego, who trained at M.I.T., Veerbhan Kheterpal, a PhD from Carnegie Mellon, and Daniel Firu, who had previously been at PDF Solutions. They took their corporate name from the number of Bitcoins that will ultimately be created: 21 million.

At that point, in spring of 2013, Srinivasan also began selling the company to the elite investors of Silicon Valley, who were still generally skeptical of Bitcoin. No venture capital firms had made any significant public investments in the virtual currency technology. But Srinivasan had the benefit of a rising Bitcoin price to help his pitch.

From the beginning, 21e6 was sold as a top secret project, allowing people to invest without needing to come out as public supporters of Bitcoin. The company was also structured as an limited liability company, rather than the C Corp typical of startups, so that people could invest with their own money.

The gallery of 30 or so people who put money in was a who’s who that – in addition to the original PayPal team and Andreessen Horowitz co-founders — included AngelList’s Naval Ravikant and the Winklevoss twins. Together the group put in $5 million for 21e6’s series A round, which closed shortly after Coinbase, another Bitcoin company, won major press coverage for a similar sized fundraising round.

21e6 was sold as a top secret project, allowing people to invest without needing to come out as public supporters of Bitcoin

For Srinivasan, part of the goal in approaching individual investors was to sell tech leaders on Bitcoin, and get them personally invested in the technology — and he would later say that it worked.

“We were pretty influential in getting many of the smart people in Silicon Valley to take Bitcoin seriously,” he told me.

It was five months after its series A that the company plugged in its first machines and started mining Bitcoins, and the company soon commanded 3 to 4 percent of all of the mining power worldwide, they told investors. At the normal rate of mining, that would have yielded about 150 Bitcoins a day.

This activity coincided with the next big run up in price – as people bought Bitcoins for over $1000 — and again 21e6 struck with investors while they were hot. In December, the company raised $25 million from Andreessen Horowitz, the firm, rather than the firm’s partners. Another $10 million was raised from 21e6’s original investors and another $30 million came in venture debt.

At the time, Coinbase, which had recently raised its own $25 million round from Andreessen Horowitz, was heralded as the best-funded Bitcoin company in the world, despite the fact that it had less than less than half as much money as 21e6.

The 21e6 investment was attractive in part because venture capital firms generally felt that they couldn’t buy Bitcoins directly. 21e6, on the other hand, offered to pay its investors back with Bitcoin dividends, allowing the firm to get Bitcoins without buying them outright. Andreessen Horowitz was also recruiting Srinivasan to join as a partner, which he did at almost the same time as the investment.

In early 2014, a growing army of 21e6 machines was rolled out, first filling up 24 racks in a data center, and then 124 racks – soon in centers that were dedicated to the mission. The company also spent lots of time figuring out a way to submerge the machines in mineral oil, as a way to cool them and cut down on the cost of air conditioning and fans.

By the middle of 2014, though, it was clear that a lot of people had invested a lot of money in designing new mining chips back when the price of a Bitcoin had been near $1000. After the collapse of the Bitcoin exchange Mt. Gox, the price had fallen to half that. Many ambitious companies like Hashfast and Cointerra, which were started by high level engineers, neared bankruptcy.

This didn’t stop 21e6, which rolled out its second generation chip, known as Gandalf, and was already working on a third generation chip, Yoda. One data center could hold nearly 10,000 machines with these chips. But the epicenter of mining was increasingly moving toward China, where the chips were nearly free and the cost of electricity – often the most expensive cost for Bitcoin miners – could be close to zero if the miner was close with a local authority of someone at a power plant.

Nowadays, most mining experts assume that over half of all Bitcoins are mined in China. Srinivasan’s company has not stopped mining – and he says that the company has paid back all of its investors. But when the company’s latest fundraising round was announced, no mention was made of the massive data centers or mineral oil immersion.

From Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper. Copyright © 2015 by Nathaniel Popper. Reprinted courtesy of Harper, an imprint of HarperCollins Publishers.
Nathaniel Popper is a reporter at The New York Times.