Bitcoin – A History of the Future, Part 2

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In part two of our four-part series on the creation and history of Bitcoin we look at how, in just a few short years, it would grow from an interesting project into an openly traded worldwide asset. From the far reaches of China to the small Mediterranean island of Cyprus, everyone seemingly had a hand in the Bitcoin pie between 2013 and 2015. The formative years of Bitcoin might have been a learning period, but it would soon become clear that huge challenges awaited this emerging global commodity.

If you haven’t already, check out Bitcoin – A History of the Future, Part 1 and find out what drove the creation of Bitcoin, how it found a home in the underworld, and who labeled it dead at $2.

Down and Out?

Toward the end of 2012, Bitcoin appeared to many outsiders to be on life support. The price had exploded and crashed back to Earth, exchanges were being hacked, Silk Road was under FBI investigation, and the mainstream media had remorselessly poured scorn on the 2011 boom and bust.

To insiders however, things were looking much rosier. Blogging site WordPress announced they were accepting Bitcoin payments in November, while in December French exchange Bitcoin Central gained a banking license, resulting in a slew of positive news and a much-needed reputation boost. In early 2013 the good news continued with payment processor BitPay surpassing 10,000 transactions without one incident of fraud, putting to the sword claims that Bitcoin was only used for nefarious means.

The price had also been quietly recovering, crawling its way from $5 in January 2012 to $13 by the end of the year. This steady rise continued into February 2013 where Bitcoin reached and surpassed its previous high of $30, which many wondered if they would ever see again, before Bitcoin made its first foray into geopolitics.

Money Mismanagement in the Med

The Mediterranean island of Cyprus and Bitcoin didn’t exactly have much to do with one another prior to March 2013. This was until the tiny European island was gripped by a financial crisis, which resulted in Cyprus having to raise $7.5 billion by taxing bank deposits. The government enforced withdrawal restrictions to avoid potential bank runs, leading to headlines across the globe and to residents looking for cash alternatives. It didn’t take long before Bitcoin grabbed their attention, and when a financial rescue package was implemented and the restrictions lifted, people rushed to withdraw their funds anyway, with many buying Bitcoin.

Off the back of this rapid adoption and the ensuing coverage, Bitcoin took off, flirting with $50 for a week in early March before passing through and taking out the psychological $100 barrier on April Fool’s Day. This was on the way to a high of $230 eight days later. Finally, the world was able to see Bitcoin in action as a force for good.

With the Cyprus crisis over, the price fell back, but remained relatively stable in the hundreds throughout the summer of 2013, dipping to a low of $66.34 during July. During this period, Bitcoin had received its own ticker on the Bloomberg terminal, XBT, a sign that the currency had come a long way in its short life.

End of the Road

On October 2, 2013 the FBI’s undercover operation against the Silk Road website came to fruition, with the arrest of founder Ross Ulbricht in San Francisco and the seizure of 26,000 Bitcoin. The news was met with an instant drop in the price of Bitcoin from $132 to $102 within a 90-minute spell, followed by days of negative stories worldwide about Bitcoin and its connection with Silk Road.

In previous years this might have dealt a more severe blow to Bitcoin, but Silk Road was no longer its only use case, with dozens if not hundreds of smaller outlets accepting it. The market response reflected this, with the price recovering back to its former value within a week. Ulbricht’s arrest marked the end of a hugely undesirable chapter in Bitcoin’s history, with advocates determined to create some better headlines in the future. Bitcoin, both in price and public perception, has never been lower.

Eastern Promise

Ironically, given the influence of Silk Road, the fall and winter of 2013 saw a new visitor to the Bitcoin circus – China. Seemingly from nowhere, the Chinese middle class began throwing yen at their native Bitcoin exchanges, with demand so high that by November 2013 Chinese exchanges were operating at almost a 100% premium for the cryptocurrency. This influx of foreign money into Bitcoin had the obvious effect, and the price of Bitcoin jumped 400% in the space of three weeks, crossing $1000 and peaking at around $1,200 on November 30. This turned many early investors into millionaires practically overnight and dashing fears that the Silk Road affair would kill Bitcoin.

China’s communist government didn’t take too kindly to the borderless decentralized currency however and, on December 5, announced a ban on banks handling Bitcoin transactions. This ban marked the end of the bull run and cut the price almost in half, before it rose back up to the $1000 mark again. Given its performance, the post-Silk Road future looked bright for Bitcoin. Amid the hype, the money and the lambos however, trouble was brewing.

The Wrath of Gox

For much of 2013, no one who used the Mt. Gox exchange, then the biggest in the world, was too interested in withdrawing their money, mainly because they weren’t making any. When Bitcoin’s price started to rise however, sellers were finding that their withdrawals were taking weeks and sometimes months to arrive. The truth was that since that spring Mt. Gox had been battling with US authorities, who had been seizing millions of dollars and closing their bank accounts, leading to difficulties in paying customers. Complaints piled up, but Mt. Gox simply ignored them.

On February 7 Mt. Gox halted all withdrawals, claiming a bug in the Bitcoin code was making transactions unsafe. A week’s silence was followed by the sudden resignation of Mt. Gox CEO Mark Karpelès from the Bitcoin Foundation board and the deletion of his Twitter account. Worried investors simply had to wait and see what would transpire, but they didn’t have to wait long. The following day the site suspended all trading and went offline, with rumors circulating of a huge hack following the leaking of an internal document. These rumors were confirmed on February 28 when Mt. Gox filed for bankruptcy. It stated that almost 750,000 of its customers’ Bitcoins and 100,000 of its own were missing, presumed stolen, in a long-running theft that had gone unnoticed for several years. The news rocked the cryptocurrency community, which Mt. Gox seemed to realize:

“However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public.”

Bitcoin’s Nuclear Winter

The fallout from the Mt. Gox affair was immense. The price crashed almost 50% from $822 on February 7 to $421 on February 28, but the bigger concern was the fact that the largest Bitcoin exchange in the world had been leaking funds for years and nobody had noticed.

Accusations that Mt. Gox had artificially inflated the price to its record levels in 2013 via in-house trading algorithms only compounded the issue. Like Mt. Gox, many investors worried that the affair would be the final nail in Bitcoin’s coffin and headed for the exits. Barring a slight spike in the summer of 2014, the price of Bitcoin fell continuously for over a year, before remaining stagnant at around $230 for another nine months. Many who hadn’t left from fear left from boredom as Bitcoin dropped out of the public conscience and, as the press had no problem describing, suffered a slow, lingering death.

But Bitcoin wasn’t dead, it was just sleeping. And it was going to wake up with a bang…

Want More?

Part three of our four-part series looks at how Bitcoin rose out of a crippling bear market to hit staggering heights.