Bitcoin is the talk of the financial world, as it threatens the very existence of the current banking sector. Given its revolutionary nature, it’s worth looking to back at what has made the world’s leading cryptocurrency such a hot topic.
Part 1: 2008-2012
It’s October 31, 2008. Halloween is in full swing, but a different kind of horror is playing out in neighborhoods all around the world. As parents shuttle children from door to door collecting candy, it’s not the costumes that are the topic of conversation this year. This year’s chatter is all about the global financial crash that has been costing jobs, houses, and savings for people of all walks of life over the past twelve months. In the last six weeks alone, Lehman Brothers has collapsed and Fannie Mae and Freddie Mac have only survived thanks to Treasury bailouts. Parents are concerned about their financial future, and the futures of the children skipping from house to house to play trick or treat.
And somewhere in the world, someone by the name of Satoshi Nakamoto is uploading a document to a website.
Let’s Get Punky
The story of Bitcoin really begins in the early 1990s at the dawn of the modern internet. In San Francisco, a group of software developers began toying with the idea of creating a private peer-to-peer digital currency that used cryptography to keep transactions private and eliminate theft. The US Government attempted to stifle the cryptography the cypherpunks developed, as well as the currencies they created off the back of them, until backing down following legal challenges from privacy advocates and civil libertarians. After this the group was left free to innovate, which they did.
Development of various cryptographies and their implementations continued into the 2000s, with one particular development being a Reusable Proof-of-Work (RPOW) system created by Hal Finney. It was clear with each new project that the various ideas were slowly amalgamating, until on that Halloween night in the midst of the worst financial catastrophe since the Great Depression, Nakamoto, or a group of persons going under that pseudonym, uploaded a nine-page white paper to www.bitcoin.org. Entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, the document built on many elements of existing and former projects, adding in twists of its own to create a clear, simple vision:
“A purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”
The electronic cash, said Nakamoto, could be ‘mined’ by anyone in the world with a computer, using a version of Finney’s RPOW to solve mathematical problems. Each miner would act as a ‘node’ and help facilitate the transfer of coins across the decentralized system, for which they would receive a share of the transferred amount as a reward. Bitcoin’s elegance and simplicity effectively killed off other more complicated projects. The search for a true digital peer-to-peer currency was over.
In the Beginning…
On January 3, 2009, a mere two months after the Bitcoin whitepaper appeared, the first ever Bitcoin block was mined. The ‘Genesis Block’ represented both the birth of Bitcoin and the workable concept of a blockchain, containing within it a line of rather revealing text in the form of a newspaper headline from the day:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
Version 0.1 of the Bitcoin software was released not long after, including some crucial information not stated in the whitepaper. There would only ever be 21 million Bitcoins mined, with the last one set to be mined in 2040. This would ensure that Bitcoin could not be created ad infinitum, guarding against the issues created by fractional reserve banking. On January 12, 2009, four days before the government was forced to bail out Bank of America to the tune of $20 billion, Satoshi Nakamoto sent the first Bitcoin to Hal Finney. Bitcoin had quietly gone from whitepaper to working product in just 73 days.
The Race for Parity
October 5, 2009 saw Bitcoin attributed with its very first dollar value by the New Liberty Standard – $0.00076 per Bitcoin. The calculation factored in a number of variables, including the cost of electricity to run a Bitcoin mining computer, but it would take four months before anyone could really make use of the dollar valuation. This occurred on February 6, 2010 when the first Bitcoin exchange, Bitcoin Market, opened for business, with an initial listing price of $0.003. May 22 saw another milestone broken when Floridian programmer Laszlo Hanyecz conducted the first purchase with Bitcoin, buying two pizzas from his local pizzeria for a tidy 10,000 BTC (worth $65 million today), a day celebrated every year by cryptocurrency enthusiasts.
Bitcoin’s second birthday coincided with a price explosion. It had already rocketed 900% over the space of five days in July 2010, peaking at $0.08, when a new exchange called MtGox came on the scene. By October 31 the price had more than doubled to $0.19. Three months later, on February 9, 2011, Bitcoin hit parity with the dollar on MtGox, marking a seminal moment in the young currency’s history. Even without a definitive use case, and driven by excitement and speculation, Bitcoin was making moves.
Bitcoin’s rise, its workings and its mysterious beginnings were beginning to catch the attention of the media, most notably an article in Time magazine on April 16, the first exposure on such a scale. The publicity from the article helped the price double in ten days to $2, but there was another reason Bitcoin was going up in price – it was finally being used.
Go East Young Man
The legacy of Silk Road in relation to the public perception of Bitcoin cannot be underestimated. To many, the collapse of the ‘eBay for drugs’, which used Bitcoin as its payment method, and the arrest and subsequent imprisonment of founder Ross Ulbricht, inextricably linked Bitcoin to illegal activities in the minds of many. This is a view that some maintain to this very day.
Silk Road was the primary use case for Bitcoin as a currency at the time, and it didn’t take long before this was exposed, via an article in Gawker magazine on June 1, 2011. The article alerted authorities to the site and to the dangers of Bitcoin, and a link between the cryptocurrency and illegal activities was forged. Amazingly, the exposé acted like a rocket booster to the price, shooting it up from $10 to $29.60 within a week. This could be viewed as a not-so-subtle response to the now watching authorities by Bitcoin users and traders – was anything capable of stopping Bitcoin?
Bitcoin’s swift ascent was almost matched by its subsequent collapse. Any exuberance regarding its short-term future was eroded over a punishing six months. As it lost 82% of its value and saw exchange after exchange being hacked, with millions of dollars’ worth of Bitcoin stolen. Confidence was lost, investors sold up and left, and the experiment seemed dead and buried.
Bitcoin’s dramatic rise and fall were documented by a number of outlets throughout 2011, including Fortune, the New York Times, and Wired, none of which were complimentary. While the market waded through a year-long bear market, eventually bottoming out at $2.05 in November that year. By June 2012 the price had risen to $5, but very little had changed fundamentally; Silk Road, now infiltrated as part of an undercover FBI investigation, was still the primary use case.
Bitcoin had been outed as the currency of choice by those buying illegal drugs and firearms, the mainstream media were either dismissive or aggressive, and a leaked FBI report stated that “…it will become an increasingly useful tool for various illegal activities beyond the cyber realm.” Add to that the fact that a user’s funds were liable to be stolen by hackers, and it seemed that Bitcoin was going to be out for the count at three years old.
And then 2013 happened…
Read Bitcoin – A History of the Future Part 2, and see how Bitcoin recovered from the 2011 collapse to reach new highs again, before China and Mt. Gox nearly sealed its fate.