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A Brief History of Cryptocurrency and Bitcoin

Basics of Cryptocurrency
Last updated June 11, 2020

Although brief, the history of cryptocurrency is quite eventful, fast-paced, and tangled with the evolution of blockchain. And believe it or not, blockchain is already getting to its third generation.

During the banking crisis of 2008, the idea of a new decentralized financial system rose up. People rallied behind its concept and started exploring new concepts and applications for it.

And with an evergrowing community, the blockchain and cryptocurrency world drew the attention of the whole world, looking for new ways to improve the economy and the existing business processes.

Understanding how cryptocurrency works can pose a decisive advantage in the future.

And that’s what we’re here for. So, let’s talk about the industry’s explosion in popularity, what happened after the “big bang”, and the technology and processes that help it thrive.

1. First of all, what is cryptocurrency?

To simply put it, a cryptocurrency is a digital currency. But unlike regular currencies such as the Euro, they’re created, secured, and verified via cryptography.

Cryptocurrencies can never exist in a physical form because all their data is stored in distributed digital ledgers. Without these ledgers, the whole system would not be able to function.

2. The Pre-Bitcoin Era

To understand the history of cryptocurrency evolution, we need to take a quick trip in “prehistory”, to 1983. Back then, computer scientist and cryptographer David Chaum developed the first anonymous electronic cash application – eCash.  

eCash allowed people to store their money in a digital format, and have it cryptographically signed by a bank. They could then use the money at any shop that accepted it, without having to open an account with the vendor.

Today, that may sound primitive. But back then, it revolutionized transactions and provided a safer way for small stores to do business.

In 1989, Chaum incorporated this system into his electronic money corporation, DigiCash Inc. DigiCash allowed electronic payments to become untraceable and laid the foundation for anonymous transactions.

advantages of cryptocurrency

SIDENOTE. Besides DigiCash, two other electronic cash systems were previously created, b-money and Bit Gold (not to be confused with the Canadian company BitGold). But their developers were unable to ensure the safety and transparency of the transactions, so the projects were never completed.

But that was only the beginning.

Almost ten years later, everything was going to change with the publication of a single whitepaper.

3. Satoshi Nakamoto and the Creation of Bitcoin

In October 2008, a developer (or group of developers) going by the name of Satoshi Nakamoto, published a paper titled  “Bitcoin: A Peer-to-Peer Electronic Cash System”. That’s how the history of cryptocurrency starts.

3 months later, on the 3rd of January 2009, they released the first Bitcoin software, and Nakamoto mined its genesis block (the first Bitcoin block) for a reward of 50 BTC.

This event marked the milestone for the first cryptocurrency and the first generation of blockchain.

And thus, a new type of transaction was introduced.

But this one was different.

Unlike eCash, Bit Gold, and b-money, the Bitcoin was decentralized. This means that all its transactions were recorded and distributed across a vast network made up of millions of computers.

centralized vs decentralized systems

The decentralization of Bitcoin meant that there was no central governing authority, such as a bank or a government.

One year later, in mid-2010, Nakamoto handed over the control over the bitcoin’s source code repository and the network’s alert keys to Gavin Anderssen, one of the lead developers in the bitcoin project.

He also transferred various project domains to important members of the bitcoin community and stepped down from the bitcoin project.

4. An Introduction to Blockchain Technology

Ok. I know what you’re thinking. How the heck does all of this work?

To answer that question, we must first talk about blockchain technology.

And it’s surprisingly simple.

A blockchain is a continuously expanding list of records called blocks, that are linked together and secured using cryptography. Each time someone adds a new block to the chain, all the systems in the network are updated.

Once the transactions are recorded in the blockchain, they are very difficult to change, and doing so requires the permission of the network majority.

blockchain system explained

But what makes blockchain so special?

Blockchain technology allows its data to be distributed, but not copied. Thus, there can only be one owner for each individual piece of data.

And since the data is distributed across a wide array of networks, all the records are easy to verify. This also makes the blockchain very resilient to attacks.

Mining made simple

I’m gonna assume that you already heard about cryptocurrency mining.

But contrary to what most people think, mining isn’t about generating new crypto coins. It’s much more important.

mining explained

Mining is a vital mechanism that allows the blockchain to remain decentralized. Yes, miners do receive bitcoins as a reward, but mining in itself is about validating new transactions and recording them in the blockchain.

Let’s go back a little.

A blockchain is a continuously expanding list of records called blocks that are linked together and secured using cryptography.

All those records need to be registered and validated in the blockchain, across the entire network.

And that’s where mining comes in. Miners compete to solve a difficult mathematical problem based on a cryptographic hash algorithm.

The solution generated is called a Proof-of-Work (PoW), and it’s exactly what it sounds like. It serves as proof that the miner invested his time and resources in solving that problem.

Once the block is solved, the miner that completed it receives a reward, which can come in the form of new bitcoins or transactional fees.

5. The Early Years and the Emergence of Altcoins

In the early years, Bitcoin represented the whole crypto industry. There was no other crypto coin, and Bitcoins were mined only by a small number of crypto enthusiasts, without having any real transactional value.

It is said that Nakamoto mined almost 1 million Bitcoin throughout 2009, all of which are still in his original wallet.

But 2010 was the breakout year for the Bitcoin. For the first time, someone made a transaction using Bitcoin. Two pizzas were purchased at the price of 10,000 BTC. At its highest value, that would amount to approximately $197,830,000.

I sure hope those pizzas were delicious.

By January 1st, 2011, Bitcoin was valued at $0.30 and had a total market cap of over $1 million. 2011 was also the year that saw the creation of other cryptocurrencies, known as altcoins.

These alternative coins were very similar to the Bitcoin, as they were created from the Bitcoin’s open source code. Their purpose was to improve various aspects of the cryptocurrency, such as anonymity and transaction speed.

The creation of altcoins

In April 2011, the world witnessed the first Bitcoin fork, and Namecoin was created using the original coin’s open-source protocol. Its primary purpose was to “protect free-speech rights online by making the web more resistant to censorship”.

But not all altcoins are created equal. Unlike Namecoin, who used Bitcoin’s open-source protocol, coins such as Ethereum, Ripple, and NXT were built from scratch with their own protocol, blockchain, miners, and wallets.

examples of altcoins

What’s the purpose of altcoins?

Like in any other market, competition is beneficial. Every altcoin seeks to become a better version of Bitcoin by improving aspects such as transaction speed, distribution method, or hashing algorithm.

All this work pushed the industry forward bit by bit and set a new standard for the development of future altcoins.

And as one of the most prominent altcoins, Ethereum came up as the standard for Blockchain 2.0, introducing a platform for dapps and smart contracts.

The popularity rise of all cryptocurrencies helped create an online infrastructure that was helping users safely trade and store their coins.

But it wasn’t all sunshine and rainbows.

The anonymity provided by Bitcoin led to the creation of massive online black markets, where people could easily buy and sell drugs, weapons, false documents, and more. One of the most renowned such websites was the Silk Road, where all the transactions were done in Bitcoin.

In 2012 the first legitimate online vendors started accepting Bitcoin as a payment method, with large companies such as WordPress and Microsoft leading the way.

And this is when cryptocurrencies exploded.

In 2013, the world was witness to the first ICO (Initial Coin Offering), held by Mastercoin, which raised over 5,000 BTC with a total value of approximately $5 million. By December, Bitcoin was worth more than $1,000, closing the year at $750.

But everything seemed too good to be true. And it was.

In 2014, Mt. Gox was the largest Bitcoin exchange in the world, handling more than 70% of worldwide BTC transactions.

But on February 7th, they suddenly stopped all Bitcoin withdrawals, and two weeks later the company’s CEO resigned from the board of the Bitcoin Foundation.

bitcoin price after mt gox

According to a leaked internal document, the company was insolvent, having lost 744,408 BTC in a theft that went undetected for years. In an official statement, the company declared that it lost over 850,000 BTC, which represented around 7% of all Bitcoins. At the time, this was worth around $473 million.

This event caused the Bitcoin’s price to plummet from $850 at the end of January to $480 by the 1st of April and dropping below $250 by August 2015.

However, in the bigger picture, this was only a minor setback.

While the Bitcoin’s price was plunging, altcoins such as Ethereum and NEO were thriving. And even Bitcoin’s infrastructure reached a new milestone – the first Bitcoin ATM was opened in February 2014.

6. The Year of Cryptocurrency

The crypto industry continued to snowball throughout 2015 and 2016, but it was in 2017 when it really shined.

Bitcoin’s price skyrocketed, reaching almost $20,000 in December. Ethereum also exploded in value, starting the year at $8.20 and ending it at $755.27, with a growth of more than 9,000%.

The market cap of all cryptocurrencies in circulation passed $100 billion by June 2017 and peaked at $850 billion in January 2018.

The massive market growth of the crypto coins helped the industry rapidly gain popularity. The internet went haywire, and everyone found out about Bitcoin and cryptocurrencies. More and more people started studying blockchain technology, and countless blockchain-based projects
appeared.

And even though many social platforms put up regulations or altogether banned crypto projects, the industry found support in Telegram.

And so, ICOs also gained popularity and became not only a viable but a highly efficient method of raising capital for tech companies.

7. What happened after

The history of cryptocurrency does not end so fast but it just began.

After such growth, the cryptocurrency market swan-dived in January 2018. Bitcoin fell under $7000 dragging all altcoins with it. A series of ups and downs followed, maintaining a resistance of over $6000.

By the end of November, the cryptocurrency market entered a long bear market.

In the summer of 2019, prices started rising again, and 2020 started with a bull market as well.

And although all cryptocurrencies faced massive liquidation in March 2020 due to the pandemic crisis, they are following a bullish trend up to today.

8. The Crypto Market Today

On a global level, currently, there is no legal regulation established for the cryptocurrency market, so it varies from country to country.

In US and EU, cryptocurrencies are not prohibited but are not recognized as legal tender. Also, incomes from cryptocurrencies are taxed accordingly to local legislation.

The Financial Stability Board, a global watchdog that runs financial regulation for G-20 economies, took a cautious tone in responding to calls from some countries to crack down on digital currencies.

“The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time”, board Chairman Mark Carney said in a letter on March 18.

In the United States, BitGo and Coinbase are approved as trusted Bitcoin custodians, and major banks such as Citigroup, Goldman Sachs, and Morgan Stanley have been preparing to enter the crypto market.  However, several countries deemed the use of cryptocurrencies illegal, including Bangladesh, Ecuador, Thailand, Russia, and Kyrgyzstan.

So after all, is there a future for blockchain technology or cryptocurrency?

Many say yes.

For the past 11 years, the crypto industry has been steadily maturing, and there is still a lot to learn about it. A study conducted by Coinbase and Qriously revealed that over 40% of the world’s top 50 universities offer at least one course on crypto or blockchain.

While the anonymity that cryptocurrencies provide remains one of their strongest points, it also poses as one of its greatest weaknesses.

Its potential for supporting money laundering and other illegal operations makes it hard for government organizations to support the market, yet new technologies are constantly striving to solve the issue.

Furthermore, it’s important to notice that even after the so-called “cryptocurrency Buble” burst back in 2018, more and more projects continued to appear, and the community always looked toward improving cryptocurrencies and blockchain.

Also big companies started researching applications of distributed ledger technologies for business purposes using smart contracts.

And if you think that there are too many blockchain projects, don’t worry.

The technology is already moving forward to Blockchain 3.0 and focuses more than ever on blockchain interoperability with projects like AION, ICON, and Cosmos.

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