History of Bitcoin
This article is a short history of Bitcoin. Our goal is to give the reader a reliable abbreviated overview of Bitcoin. We will reference places where the interested reader can learn more about specific topics or dive deeper.
The history will be structured around Bitcoin’s trade price (as a reflection of market sentiment) and page views of wikipedia (as a reflection of broader awareness).
2008/2009: Bitcoin’s birth
In November 2008, someone going by the user name ‘Satoshi Nakamoto’ released a paper to a cryptography mailing list. The 9-page paper was entitled “Bitcoin: A Peer-to-Peer Electronic Cash System“, and it laid out a vision for a distributed digital money system.
In January 2009, Satoshi Nakamoto released the first version of the open-source bitcoin core software on SourceForge and the bitcoin protocol started running. Nakamoto mined the first 50 bitcoins. The protocol was a breakthrough in cryptography, though it drew on developments that had preceded it but hadn’t been combined yet.
Bitcoin ran quietly in the background—a topic of excitement and fascination for a dedicated crowd of coders but largely off the world’s radar. Discussion was distributed across different forums, and it wasn’t until the end of the year that the first dedicated forum was established. This helped coders could more easily coordinate with other coders as the underlying code got tweaked. By mid-2009, people other than Satoshi Nakamoto were actively contributing to the open-source codebase in Github.
The protocol was a breakthrough in cryptography, though it drew on many cryptography innovations that preceded it. A community of cryptography experts and privacy advocates known as the Cypherpunks (cypher not cyber) played a key role in recognizing the technical genius of Bitcoin and understanding its implications. Many members of this community would become torchbearers later in Bitcoin’s history.
As 2009 ended, Bitcoin did not have a ‘trade price’ and 309 people viewed the Wikipedia page.
2010: Bitcoin’s very early years
The Bitcoin ‘ecosystem’ was largely just a record of Bitcoin transactions (the blockchain), a set of online forums where users communicated and organized transactions, and the open-source software code. There were no wallet services, payment processors, or real user interface beyond actual command prompts and raw code. This limited involvement to a dedicated and savvy crowd who organized transactions through online forums and initiated them on the blockchain with code. For example, the first commercial transaction took place in May 2010: a programmer in Florida spent 10,000 BTC on a pizza.
However, beginnings of a market support system began to emerge. In early 2010, the first exchange opened, which allowed structured trading of bitcoins. The first “article” on bitcoin appeared on Slashdot and stoked interest beyond the initial insider cryptocurrency crowd. Users grew. In late 2010, Mt. Gox launched as the second exchange and became the dominant place to trade Bitcoins for a couple years.
As 2010 ended, the price of 1 Bitcoin was $.3 and 309 people viewed the Wikipedia page.
2011: Bitcoin finds niche uses and awareness grows
In 2011, Bitcoin began to mature as a digital payment system, though its use was limited by the aspirations of early adopters.
The perceived anonymous nature of the digital currency made it perfect for online black markets. That year saw the emergence of the Silk Road, an ebay for illicit goods (predominantly drugs) that used Bitcoin as a payment method. The Silk Road was one of the public’s primary introductions to Bitcoin, prompting several politicians cast the currency as a vehicle for money laundering and drugs.
Mainstream media also began covering it. Forbes, Bloomberg, and TIME all wrote articles. Politicians warned against it. Academics wrote about it. At the end of the year, CBS aired an episode of the “The Good Wife” that focused on bitcoin.
Other consumer services were also starting to emerge. WikiLeaks started accepting Bitcoin donations. An iPad app was launched. Bitpay, a service that let merchants accept bitcoins over the phone, was founded and claimed to have 100 merchants. More exchanges opened, letting people trade bitcoins for other currencies.
The Bitcoin code also underwent a major change. Through 2011, Satoshi Nakamoto had overseen the maintenance of the codebase. Satoshi never called or met anyone and only communicated on forums and direct messages. In April 2011, Satoshi Nakamoto wrote his last verified email, leaving Gavin Andreson in charge of the project, and left, never to be (verifiably) seen or heard from again. Andreson quickly selected four others to share this responsibility and introduced some structured ways of updating the underlying code.
“He told myself and Gavin that he had moved on to other things and that the project was in good hands.”
– Mike Hearn describes the last thing he heard from Nakamoto
Also in 2011, the first alternative digital currency or “altcoin”, Litecoin, launched.
The world was in an awkward time in which financial markets were doing well but workers were not. Occupy Wall Street started in September and soon Occupy protests had taken place in almost 1000 cities worldwide. It is easy to see how the idea of a bankless currency could take root.
By the end of the year, the world was deeply ambivalent about the digital currency. A currency for the 21st Century that could topple banks? A tool for laundering money and buying illicit substances?
As 2011 ended, the price of 1 Bitcoin was $4.60 and 2185 people viewed the Wikipedia page.
2012: Bitcoin matures
Bitcoin was riding a wave of legitimacy in many circles, and these were having conflicting effects.
The currency became a popular target for hackers and thieves. Mt. Gox had been hacked in 2011, and now more major attacks on exchanges and other databases led to millions of dollars worth of Bitcoin theft. Several Ponzi schemes ended with theft.
Black markets utilizing bitcoin as a payment method continued to operate. It’s estimated that $15 million worth of Bitcoin passed through the Silk Road this year. A popular online gambling site, Satoshi Dice, launched and flooded the bitcoin network with very small gambling transactions (bets worth less than $.0001). This sparked a debate on how to deal with such ‘transaction dust.’
More generally, the community was feeling the impacts of having no central authority. There were no dedicated funds to support core development of the code and no sanctioned gathering places places other than online forums.
The Bitcoin Foundation was also established. Its role was to fund core development, represent the currency to governments, and conduct outreach and education. Late that year, a Bitcoin exchange Bitcoin-central.net was licensed similar to a bank in Europe.
As it garnered the attention of more governments, its legal ambiguity became more obvious and more awkward. People were trading it like an asset, using it like a currency, and downloading it like open-source software. Gambling and the Silk Road didn’t help. Some services started dropping bitcoin out of fear of its legality.
Broadly, this is a year in which the industry also saw the promise of banking the unbanked with Bitcoin. Forbes runs one of the first mainstream articles discussing Bitcoin’s use in remittance payments. WordPress started accepting Bitcoin, explaining that traditional payment processor restrictions were preventing international bloggers from participating in the blogosphere.
As 2012 ended, the price of 1 Bitcoin was $13.44 and 2809 people viewed the Wikipedia page.
2013: The world wakes up to bitcoin
2013 was one of the most tumultuous years for Bitcoin. It had two period of incredible volatility in which people literally woke up to almost 100% price increases.
The first occurred in early 2013. A bail-out deal between the EU and Cyprus included a levy on bank accounts with sizeable sums of money, inspiring Cypriot account holders to buy bitcoin en masse. The Bitcoin price almost doubles, and Cypress sets a precedent for using Bitcoin as a means of capital flight.
Bitcoin survived one of its first major crises of legitimacy this year: the shutting down of the Silk Road and the arrest of its founder. The government seized all assets and helped cement public association of Bitcoin with online black markets. After a quick price drop, the price quickly recovered, but Bitcoin has lived in the Silk Road’s shadow ever since.
Globally, governments began to take Bitcoin more seriously but reactions were mixed.
- The People’s Bank of China, after initially approving Bitcoin, banned financial institutions from using it or working with customers whose businesses involve it.
- The US Department of Homeland Security declared Mt. Gox a ‘money transmitter’ (a heavily regulated entity) and moved to seize some of its assets.
- US Financial Crimes Enforcement Network (FINCEN) issued some of the world’s first bitcoin regulation in the form of a guidance report for persons administering, exchanging or using virtual currency. In particular, exchanges must comply with money laundering laws and register as Money Services Businesses.
- The US Senate held a hearing which was (to the surprise of many) open to the long-term prospects of Bitcoin.
The second period of volatility occurred in November. In 30 days, the price went from just over $100 to just over $1200. Searches for bitcoin spikes. News outlets covered it. In 30 days, it went from a successfully digital currency proof-of-concept to a new technology in the eyes of the world. The price plummeted back down in December, but it never stayed below $200 again.
The swell of popularity led to an explosion of “altcoins”—digital currencies based on modified or different underlying protocols. Litecoin had been the first, back in 2011, but 2013 saw hundreds of these new altcoins launch. Many turned out to be scams, but many are also still traded today.
As 2013 ended, the price of 1 Bitcoin was $764 and 26354 people viewed the Wikipedia page.
2014: Bitcoin beyond cryptocurrencies and cryptocurrencies beyond Bitcoin
In early 2014, Bitcoin survived another major crisis of legitimacy: the closure of Mt. Gox. Mt. Gox had been the longest-running and most successful virtual currency exchange to date. It was a pillar of both the bitcoin economy and the community. In February, Mt. Gox abruptly shut trading, and leaked documents show it had lost 744,000 BTC (approximately $40 million). Bitcoin naysayers had a field day on forums, and it was widely seen as a blow to the digital currency’s ability to operate safely without any oversight or regulation.
Governments began to pass regulation this year. The wild end to 2013 woke many regulators up to the volatility of this currency. The IRS declared Bitcoin to be taxed as property. The People’s Bank of China forced Chinese banks to close the bank accounts of major Chinese exchanges, though many exchanges exploited legal loopholes to keep operating. New York announced its Bitlicense: a legal licensing framework for businesses that interact with Bitcoin and cryptocurrencies. This is largely decried by the cryptocurrency community. The dream of unregulated cash was quickly fading.
The currency also traveled more into the payment mainstream, and a wave of major retailers accepted the currency. Overstock, Tiger Direct, Newegg, Dell, and Microsoft all announced acceptance of Bitcoin. Near the end of the year, a subsidiary of PayPal announced it will work on integrating Bitcoin on their platform.
Another development in the world of cryptocurrencies is that many many people began imagining Bitcoin without the digital currency part: how could the underlying technology be used for other purposes?
A wave of new protocols emerged with applications beyond digital currency, presaging a so-called “Bitcoin 2.0” era in which people would repurpose blockchains (Bitcoin’s and others) to store all kinds of information. Some notable ones included
- Ethereum, a platform for software that could run on a distributed network.
- Maidsafecoin, a protocol to allow distributed file storage built on top of the Bitcoin blockchain
- Factom launches to create a data layer on top of the blockchain to enable simple, verifiable, and secure record keeping.
This reflected the rising awareness of what early enthusiasts had thought: the technology of cryptocurrencies could be the foundation of the next Internet. Today is like the early 90s, and in the coming years, blockchains could remake everything. The idea was planted, but with it, a sobering realization: this process would take time.
Despite these developments, Bitcoin’s price began a slow decline this year that would bottom out in early 2015 below $200 and stay relatively dormant for months. Part of this decline was a shift in capital from bitcoin to other digital currencies. Bitcoin’s contribution to the total market value of all cryptocurrencies fell from a higher of 95% in August to 78% in December. Another was the realization that upending global financial markets wouldn’t happen overnight. Bitcoin was not above the law, and financial law was very complicated. Bitcoin had the potential to be disruptive but disruption can be slower than founding visionaries hoped. In many ways, cryptocurrencies faded from the public eye.
AS 2014 ended, the price of 1 Bitcoin was $314 and 6162 people viewed the Wikipedia page.
2015: The business blockchain
The basic features of this industry mostly continued. Hacks and theft continued, including a high-profile loss of close to $5 million from a major exchange at the beginning of the year.
Regulators around the world continued to explore the implications of this technology while also proving that users of Bitcoin are not beyond the reach of the law. Ross Ulbricht, founder of The Silk Road, is sentenced to life in prison without parole for actions that were “terribly destructive to our social fabric.” Mark Karpeles, CEO of Mt. Gox, is arrested in Japan. Two federal agents who stole Bitcoin during the Silk Road investigation plead guilty.
The biggest shift came from banks and industry. Many industry executives began talking about “blockchains” and “distributed ledgers” rather than Bitcoin. Microsoft launched blockchain-as-a-service (BaaS) on its Azure cloud-computing platform. This allows companies to experiment with blockchains and explore how they could be used in different areas of their business.
This likely contributed to the growth in interest in Bitcoin among the broader public and among traders. Bitcoin’s price began a steady ascent as people started realizing Bitcoin and blockchains were still around.
However, a crisis was brewing in the form of the “block size debate.” The Bitcoin protocol was designed to process approximately 7 transactions per second; the blocks in the blockchain were not large enough to store more. Members of the community realized Bitcoin was on pace to reach that in 2015. If nothing was done, it could stymie the currency’s growth in popularity.
What followed was a bitter and divisive debate about whether to increase the size of the Bitcoin blocks (allowing more transactions per second) or to reposition the Bitcoin blockchain as a ‘settlement layer’ while allowing other services to process transactions that happen off-chain. In Bitcoin, there are no democratic rules, public sanctioned spaces to gather, or Robert’s rules of order. Reddit, Bitcointalk, and a couple other online forums were serving as venues for ‘public’ discussion, and the Bitcoin Foundation began hosting events toward the end of the year.
No one could agree, and the debate was fierce. This deadlock struck a blow to Bitcoin’s perceived legitimacy. If it couldn’t deal with a challenge like this, how could it deal with others? People started talking seriously about other currencies that might be viable alternatives to Bitcoin. Ethereum topped that list, and in early 2016, its price would increase tenfold.
As 2015 ended, the price of 1 Bitcoin was $426 and 4730 people viewed the Wikipedia page.
2016: A Year of Promise
It is too early to tell the story of 2016 for Bitcoin. Many of the trends that coalesced in 2015 continued: more enterprise and corporate interest in blockchain technology, more uncertainty over the block size debate, and some price volatility.
Security remains an issue. Just this year, Gatecoin, a major exchange based in Hong Kong, lost $2 million and suspended trading. Shapeshift, a major US-based exchange, suffered a series of hacks in a saga that reads like a crime novel.
Broadly, industry players in finance and technology remain bullish on blockchains and ambivalent about Bitcoin. More and more startups are branding themselves as blockchain companies rather than bitcoin companies. A new ambivalence about Bitcoin has emerged: not as a dangerous quasi-legal currency but as a good proof-of-concept that ultimately won’t be ready for primetime. As they say, “the pioneers get the arrows, the settlers get the land.” At a premier industry conference, some compared Bitcoin to Netscape.
But Bitcoin’s price continues to rise.