Where it all began...
On January 11th 2009, the first Bitcoin transfer between two parties occurred. Satoshi Nakamoto sent 10 bitcoins to Hal Finney. But who were these people? And what was the significance of it? The story begins 30 years earlier when computer scientists and mathematicians tried to bring encryption to the public [1]. The US government tried to squash their efforts with threats, prosecution and covert surveillance [2]. This strong reaction was the breeding ground for a generation of computer scientists called the cypherpunks [3].
When the 2008 financial crisis struck and governments bailed out irresponsible banks, cypherpunks took notice. A money that governments could not censor or manipulate had been on their mind for a while. Cypherpunks such as Nick Szabo, Wei Dai, David Chaum or Hal Finney had developed several imperfect prototypes [4]. Then, at the end of 2008, a previously unknown programmer named Satoshi Nakamoto published his idea and software implementation. He called it Bitcoin [5].
Bitcoin solved many problems which the cypherpunks had addressed in isolation, but never together. For instance: How can you prove you own an account without sending your password to anyone? Or, how can you get thousands of parties to agree on the balance in each account? Is it possible to prevent malicious users from altering the record of transactions without centralized checkpoints? Satoshi's solution was met with skepticism, but the system was rock solid. His time-chain was an ever growing record of transactions since 2009, each block recording the transactions of the last 10 minutes. It would eventually be known as the Bitcoin blockchain. Surprisingly, anyone with a computer could update the ledger. The people recording the latest transactions were called nodes. To verify that the updates were correct and prevent cheating, computers called miners participated in a lottery. For their efforts keeping the network honest, they were awarded at random a few bitcoins every 10 minutes. This is, incidentally, how bitcoins are issued. However, only 21 million bitcoins will ever be issued. Once they are, in a century, miners will be incentivized by transaction fees.
Suddenly, in 2011, Satoshi wrote that he had moved on to other things. No one has heard of him again. Whether Satoshi was a group or a single person remains a mystery. In 10 years he/she has not touched a single Bitcoin out of the ones initially mined (currently worth billions). That same year, tech enthusiasts got wind of Bitcoin. They had noticed three things:
- Competent and highly-motivated people were working on the technology
- Network effects were growing exponentially: like facebook, the more users on the network, the more interactions can happen.
- Increasing demand would eventually meet finite supply (With only 21M bitcoins, even a small economy would result in high prices. Fortunately bitcoins have not just cents, but centi-million-ths. 0.00000001 is the smallest unit)
People imagined an unstoppable technology: Global by nature, without a central point of failure and offering new efficiencies for finance and commerce. Never before had it been possible to settle a global transaction ranging from a cent to a hundred million without trusting a bank or a government. 2011 saw the first bubble when this demographic drove the price from $0.3 to $30.
Three more waves would follow. 2013, 2017, and 2021 each attracting a new group of people. With each wave new applications and new ideas emerged. This gave rise to somewhat altered copies of Bitcoin (Litecoin, Dogecoin, Bitcoin Cash), or to innovative new experiments (Ethereum, Monero, or recently Solana). Each questioned several assumptions: Can it be faster? Can the sender and receiver be completely anonymous? Could transactions be programmed and automated? These experiments gave rise to what are known as Altcoins, each one filling a niche in the cryptocurrency space.
A stable future?
One important development of the last few years was the creation of stablecoins on several blockchains. Despite their desirable properties, most cryptocurrencies are highly volatile due to their small size. Stablecoins offer many advantages of crypto (easy to transfer globally, available 24/7, programmable) but are pegged to the US Dollar or the Euro, providing stability and certainty.
We have touched on the origins of Bitcoin and how it captured the imagination of the financial world. Learn what it takes to invest wisely in the crypto markets.
Essential References
[1] 1991, Philip Zimmermann, Why I wrote PGP , www.philzimmermann.com
[2] 2020, Mark S. Miller, When Encryption was a crime, video: Cypherpunks Write Code | The Clipper Chip
[3] 2019, Haseeb Qureshi, Nakamoto: The cypherpunks | 1992-1999 Crypto Anarchy cypherpunk mailing list
[4]2008, Satoshi Nakamoto, The Bitcoin Whitepaper
[5]1989 - 2004, Pre-history of Bitcoin: Nick Szabo, b-money, Hal Finney, David Chaum, DigiCash
[6] 2011, Joshua Davis, The Crypto-Currency, The New Yorker