For most people, the cryptocurrency sector is a relatively recent phenomenon, with the term really only entering the public consciousness in the past 12 to 18 months. Although some people may have heard about Bitcoin before that, in the public sphere it was often associated with the black market to such an extent that they would have been forgiven for thinking that Bitcoin was a criminal enterprise itself. However, for early adapters, Bitcoin and cryptocurrencies are a concept that has been with them for over a decade.
This post will trace the history of cryptocurrency from the initial proposals for digital currencies pre-Bitcoin, the early history of Bitcoin, the increasing popularity of so-called ‘altcoins’ and the explosion in popularity of cryptocurrency in 2017.
The concept of digital currency was mooted for many years before Bitcoin. DigiCash, the first known electronic cash company, was founded in 1990. Later, more established money transfer companies such as Paypal provided users with an online money transfer service. However, although the concept of a decentralised digital currency operating in a manner similar to Bitcoin was proposed as early as 1998, the plans were never implemented, in part because of an inability to ensure that transactions were secure and verifiable.
Bitcoin & Blockchain Technology
Based on a 2008 whitepaper written by an anonymous programmer (or programmers) working under the (assumed) pseudonym Satoshi Nakamoto, the Bitcoin software was implemented as open source code and was released in January 2009.
Bitcoin (and all subsequent cryptocurrencies) is based on distributed ledger (or blockchain) technology which, through a peer-to-peer network, links records of all of the transactions carried out within the network using cryptography. Blockchain technology is based on the concept that in order to avoid double spending of a currency (i.e. spending the same money twice), data is required to be stored across the network, meaning that every user of the network needs to authorize the transaction in order for the transaction to be verified.
The decentralized system has the additional benefits of there being no centralized points of vulnerability or failure, making it difficult to hack and being immune from localized power or equipment failures. Furthermore, the decentralization of Bitcoin means that there is no central governing authority or controlling body, such as a bank of a government, required to ensure that the system continues to operate and every user is responsible for the storing and safety of their own funds within specialized wallets.
New blockchain blocks are created using a process called mining, which, in the Bitcoin ecosystem, uses computing power to record transactions in blocks on the chain. Mining using computing power is called ‘proof of work’ (PoW) mining, with the ‘work’ being the power the computer is using to solve the cryptographic algorithms necessary to record the transactions.
Although PoW was the original formula for verifying transactions, alternative mining formulas such as ‘proof of stake’ (PoS), whereby participants must prove that they have a significant stake in the system before they can be selected to mine (or mint) new blocks onto the blockchain, have also been developed and are gaining traction due to the perceived negative environmental effect of the computing power spent on mining Bitcoin and other PoW cryptocurrencies.
Aside from its security, the stated benefits of the technology is that transactions are recorded efficiently, transparently and in a verifiable and permanent way.
Early History of Cryptocurrency – 2009 to 2013
For the first couple of years of its existence, cryptocurrency was Bitcoin. In its first year, Bitcoin was only mined by a small number of enthusiasts and had no transactional value. Nakamoto is estimated to have mined about 1 million Bitcoin during 2009, none of which have ever been used since. However, in 2010 Nakamoto stepped away from the Bitcoin project and has not been publicly involved in the Bitcoin project since then. Furthermore, Nakamoto has never been publicly identified and his / her / their identity has been subject to much speculation, especially as the 1 million Bitcoin mined by Nakamoto would now make him / her one of the wealthiest people in the world.
In 2010 the first Bitcoin transactions for value begun to occur through users of the Bitcointalk forum, with one of the first transactions for value being the purchase of two pizzas for 10,000 BTC. By 1 January 2011, one Bitcoin was valued at $0.30, with the total market cap being in excess of $1 million.
2011 saw the creation of other cryptocurrencies (often known as altcoins). These alternative coins (one of which was Litecoin) were forks of Bitcoin using the open source code and were intended to improve upon certain elements of the Bitcoin design, such as speed or anonymity. Along with competitors, Bitcoin’s increasing popularity led to the creation of an online infrastructure for users to trade and store their Bitcoin, with the first Bitcoin exchanges being launched. Bitcoin’s valuation peaked at almost $30 in June 2011 before falling and ending 2011 valued at just over $5.
The June peak coincided with an article by the website Gawker on the Silk Road, an online black market where contraband items such as illegal drugs and false identity cards were traded, with Bitcoin being the only accepted payment method as a result of its pseudo-anonymity. The Gawker article was one of the first relatively mainstream articles on Bitcoin and Bitcoin and the black market has long been linked as a result of this association.
In 2012 the first legitimate online merchants began to accept Bitcoin as a form of payment. WordPress was the first major website to accept payment in Bitcoin but other retailers soon followed, including Microsoft. This was considered to be the first step towards Bitcoin and cryptocurrency being widely accepted internationally as a legitimate payment method. By the end of 2012 the value of Bitcoin had reached over $13. 2012 also saw the development of more ‘altcoins’, including Ripple, a cryptocurrency system with much faster transaction times than Bitcoin that does not require mining (a polarising concept in the cryptocurrency community).
2013 was the first year that Bitcoin truly flirted with the mainstream. By December of that year, the value of one Bitcoin had peaked at over $1,000 before ending the year at over $750. The substantial growth in the value of Bitcoin during 2013 was at least partly because of the increasing number of vendors willing to accept it as a currency and the resultant increased exposure of the cryptocurrency but also may have been as a result of market manipulation, with academic research suggesting that the rise had much to do with artificial trading between two trading bots operating on the Mt Gox exchange.
2013 also saw the first Initial Coin Offering (ICO) being held by Mastercoin, a means of crowdfunding cryptocurrencies which has proven controversial due to the lack of regulatory oversight placed on them. As discussed later, ICO’s have come under increasing scrutiny since 2017 with a number of countries banning them completely.
2014 – 2016 – Mt Gox and the Development of Smart Contracts
In February 2014, Mt Gox was the largest Bitcoin exchange in the world. However, a massive hack in that same month resulted in the theft of over 6% of total Bitcoin in circulation at that time. Aside from the scale of the theft, the Mt Gox hack also focused attention on the security of cryptocurrency for holders. Although a blockchain itself is effectively unhackable by existing technology, exchanges offer a centralised point upon which hackers could focus on. The Mt Gox hack also signalled the beginning of a bear market for the value of Bitcoin, which dwindled in value from over $950 in January 2014 to $200 by August 2015. It was not until the beginning of 2017 that Bitcoin surpassed it’s all time high market valuation.
A number of other notable cryptocurrencies were released in 2014 and 2015, including NEO and Ethereum, two of the first platforms that enabled the development of smart contracts on the blockchain, and IOTA, a cryptocurrency intended to interact with the Internet of Things.
During this time the infrastructure surrounding Bitcoin also continued to improve, with the first Bitcoin ATM opening in February 2014. By September 2017 an estimated 1,500 Bitcoin ATM’s were in existence worldwide, with Ethereum ATM’s also gaining prominence in 2017. In addition, in 2015, US-based Coinbase became the first regulated Bitcoin exchange.
2017 and beyond – The Breakout
2017 was the breakout year for cryptocurrencies in the mainstream. In terms of value, Bitcoin led the way, rising to a peak value of almost $20,000 in December 2017. Meanwhile, Ethereum rose over 9,000% while Ripple rose a staggering 36,000% during the course of the year. The total value (or market cap) of all of the cryptocurrencies in circulation passed $100bn in June 2017 and peaked at $850bn in January 2018 before falling back over 50% at the time of writing. This has been described by some commentators as a Bitcoin or cryptocurrency ‘bubble’, with some labelling it as the largest bubble in the history of the world. Much of the commentary surrounding this has centred on how cryptocurrencies act as a store of value, with some labelling Bitcoin as ‘tulips’ (in reference to the Tulip mania speculation bubble of 17th century Netherlands) while more bullish commentators suggest that 2017 was only the start of the rise in value of cryptocurrencies, while predicting future rises of hundreds or thousands of percent.
ICO’s also became increasingly popular in 2017, with tracking websites suggesting that an average of over 50 ICO’s occurred per month. This, in part, has led to a huge increase in the number of cryptocurrencies available to trade, with over 1,500 currently listed on tracker website Coinmarketcap.
Aside from the trading element, 2017 was a landmark year for the variety of projects being proposed. Many industries have begun to consider how blockchain technology can improve their processes and, as a result, many of the ICO’s launched in 2017 were intended to solve specific perceived issues within certain market sectors as opposed to be a competitor to Bitcoin as a digital currency. These cryptocurrencies, based on smart contracts, are often referred to as ‘tokens’ and many of them are based on the Ethereum blockchain, which facilitates the creation of such decentralised applications (or dApps).
The rise of popularity of cryptocurrency in 2017 was not without its problems. The increasing number of transactions on popular blockchain networks such as Bitcoin and Ethereum led to some delays and an increase in transaction fees, especially during busy periods. This led to concerns in the industry about the scalability of blockchain technology and whether the technology could ever replace existing centralised alternatives (such as Visa or Mastercard). Furthermore, the increased popularity put strain on the infrastructure of the cryptocurrency exchanges, with many struggling to cope with the demand from investors. Additional concerns included the environmental effect of the energy being spent on mining cryptocurrencies (using Proof of Work) and the volatility of the market.
The increased popularity of cryptocurrency in 2017 has also led to increased governmental scrutiny. Although the regulation of Bitcoin and other cryptocurrencies has been mooted since 2011 (in the aftermath of the perceived connection between Bitcoin and the black market), there was little regulation implemented internationally. However, the rise of ICOs, in particular, has led to increased scrutiny of the cryptocurrency industry and although much of it is still at the proposal, it is inevitable that regulation of some sort will be introduced in most countries. How this will affect the industry remains uncertain. In one sense, the libertarian idealism of decentralised cryptocurrencies that operate without government interference sits uncomfortably with the concept of governmental regulations of any type. On the other hand, in order to unlock its full potential, the cryptocurrency industry must ensure that its investors are protected from fraud or hackers, and increased regulatory oversight is likely to be the most transparent way of creating such investor confidence.
Although there is nothing certain in the technology industry, it would appear that blockchain technology and cryptocurrencies are here to stay. Although there are still flaws in the sector and widespread adoption may be some years away with many cryptocurrency projects still at an embryonic stage, there is a level of acceptance spreading through industry that blockchain technology will have a fundamental impact on how transactions are carried out and how individuals interact through the internet.
How this occurs and what effect it may have on society remains unclear (the internet itself was invented as a means for scientists and researchers to communicate and share information, as opposed to a platform on which to share cat videos), it would appear clear that we are at the beginning of a blockchain revolution which could potentially lead to a more transparent and efficient global economy.