A Brief History of Bitcoin
2017 was the year for Bitcoin. Its value soared at an astonishing rate, with one Bitcoin closing at over $14,000 on New Year’s Eve – an amazing 1,300% increase since the start of the year. With many early investors becoming very wealthy virtually overnight, it sparked a frenzy of media hype and public attention, including unprecedented levels of investment across the globe. We thought we’d take a look at where it all began…
What is cryptocurrency?
Going back to basics, Bitcoin is a form of digital currency known as cryptocurrency. Cryptocurrencies are so-called because they are secured, transferred, and created using cryptography (code). It is designed to be secure, and in many cases, it’s also anonymous. It’s not like printed, physical money but can be used to buy things electronically and, crucially, is not controlled by any one person or government. Bitcoin was the first, but there are now more than 1,000 different cryptocurrencies out there.
Bitcoin wasn’t the first attempt at using encrypted ledgers to secure an online currency. Bit Gold and b-money are early examples, but they were never fully developed. Their creators would become some of bitcoin’s earliest supporters.
Bitcoin.org was registered, and in October, a paper called ‘Bitcoin – A Peer to Peer Electronic Cash System’ was posted to an online discussion forum on cryptography by someone calling themselves Satoshi Nakamoto. The idea behind it was that Bitcoin would be a decentralised currency, not linked to any governments.
We still don’t know the identity of the mysterious Nakamoto – Bitcoin’s founder – but there are a few prime suspects. It’s estimated that whoever is behind the pseudonym has around one million Bitcoin.
The first Bitcoin client was made available to the public. Users earn Bitcoin by using their computer processing power to solve problems (blocks). This process is known as mining. The very first block was mined by Nakamoto for a reward of 50 Bitcoin. Hal Finney, one of the first supporters and adaptors of Bitcoin, received 10 from Nakamoto in the first-ever transfer.
It was stipulated that only 21 million Bitcoin would be available, laying out that even though Bitcoin isn’t a physical commodity, there is still a finite amount. Much like mining gold, the process was easy in the beginning when there was an abundance, and as more and more have been earnt, mining has required more and more processing power for less and less reward. The rewards started at 50 Bitcoin (BTC) per block and would be cut in half for every 210,000 blocks mined thereafter. At present, the reward is 12.5 Bitcoin for each block.
Bitcoin wasn’t used for trade in its first year so had no real value. In 2010, someone traded 10,000 Bitcoin for two pizzas – a value in today’s market of more than £100 million – ouch!
A major vulnerability in the protocol was spotted on August 6th and soon exploited. Transactions weren’t properly verified before being included in the blockchain (transaction log) and to resolve this, the network agreed to move to an updated version of the protocol (known as a fork).
The idea of a decentralized currency began to catch on with other cryptocurrencies starting to emerge including Litecoin (and many, many others). Tech elites have a growing interest.
2012 – The first-ever halving of bitcoin
Block 210,000 was solved, which meant that the Bitcoin reward was halved to 25 BTC (known as the ‘Halving Day’). If you’re interested in seeing how many blocks need to be solved before Bitcoin halves again, some clever bods have set up a website with just that purpose.
In February, Bitcoin payment processor Coinbase reported selling $1,000,000 worth of Bitcoin in a single month, at over $22 per coin.
Cameron and Tyler Winklevoss – the twins who sued Facebook founder Mark Zuckerberg for $65 million – start dabbling in cryptocurrency. By April 2013, they own around $11 million worth of Bitcoin. It’s estimated they own 1% of all available bitcoin.
One Bitcoin sold at $1,000 for the first time and people start to sell, causing the prices to fall to around $300. It takes a few years for the price to recover. Meanwhile, in Wales, James Howells threw away a hard drive from his old laptop. Some months later he realised it held a digital wallet which contained 7,500 Bitcoins. They’d been mined in 2009 when they were worth essentially nothing. In 2013 they’d have been worth up to £9,000,000!
In January 2014, Mt. Gox (one of the world’s largest Bitcoin exchanges) went offline. 850,000 Bitcoins vanished with it, never to be seen again. At the time, they were worth $450 million.
Ethereum, another cryptocurrency which launched in 2015, forks. The original blockchain continued as Ethereum Classic, while the new improved version became Ethereum. Both currencies are still around, and Ethereum is the second-largest cryptocurrency (and it’s benefiting from the current Bitcoin boom).
Bitcoin hits the big time. At the start of the year, Bitcoin was hovering around $1,000. By November, it broke $10,000 for the first time. Bitcoin’s high to date was on December 7th when some exchanges recorded highs of over $17,000 for a single Bitcoin. At the end of the year, around 80% of all Bitcoin has been mined.
The University Of Cambridge estimates up to 5.8 million unique users use a cryptocurrency wallet, and the majority of those will be using Bitcoin.
So, why did everything get so manic for Bitcoin?
There are a number of factors: forks, fear, futures.
A fork is essentially a chance to change the system. For it to be a hard change, the majority of the Bitcoin community (those mining the blockchain) have to agree that the change is for the better. In August 2017, there was a hard fork (Segwit2x) which was designed to speed up transactions and make bitcoin more viable.
Everyone knows someone who’s made money by investing early and, as the prices rise and rise, people are seeing this as their opportunity to make fast money. As more people see their opportunity for a crypto-retirement, the prices rise and rise. And as the prices rise, more and more people want their slice.
Banks are beginning to offer Bitcoin futures, which means it is possible to get involved in the currency without investing in it directly. Before futures went live, Bitcoin was incredibly volatile because no one knew how this was going to impact the currency. We still don’t, but at the moment, it’s looking good.
With 24-7 unregulated trading, an ever-increasing cost of mining Bitcoin, and a crazy amount of interest in investing, it’s completely impossible to say what will happen next. Warren Buffet famously called Bitcoin a ‘mirage’ and warned people to ‘stay away’. People who have made small fortunes would say differently.
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