The history and prospects of Bitcoin
The idea of a currency independent of central banks has inspired and motivated many developers for decades. But it wasn’t until 2009 that their dream would come true with the Bitcoin launch. This is an article on the history and prospects of Bitcoin in 3 parts.
- The beginnings of Bitcoin
- From drug money to official national currency
- What could Bitcoin’s future look like?
Part 1: The beginnings of Bitcoin
The Long Prehistory of Bitcoin
The effort to create an alternative to the prevailing fiat currencies goes back a long way. As early as the 1970s, approaches emerged that were to lead the way for later cryptocurrencies. But all attempts to revolutionize the financial system from the ground up failed. As a rule, they failed due to a fundamental problem: How is it possible for a digital asset to be used only once? How can it be ensured that copying does not distort its value?
With the triumph of the Internet in the 1990s, cryptocurrencies came more into focus. One of the pioneers of that time was computer engineer Wei Dai, for example. His basic idea, published in 1998, was to send a digital currency using untraceable pseudonyms to ensure secure transactions. Another approach from the same year, Bit Gold, was developed by Nick Szaba and aimed to overcome inefficiencies in the traditional financial system. He counted among these, for example, the trust that had to be placed in traditional financial transactions, as well as the cumbersome process of producing coinage.
In 1997, Adam Back designed Hashcash, a cryptocurrency with a hashing algorithm. To earn it, computers were supposed to perform complicated calculations. Bitcoin is still based on this mechanism today, known as proof of work. Back and other cryptographers have provided valuable impetus with their work, without which Bitcoin would not exist in its current form. It is therefore only logical that Satoshi Nakamoto mentioned many of them in the Bitcoin whitepaper some ten years later.
The origin of Bitcoin
The fact that Bitcoin emerged during the global financial crisis is no coincidence. Between 2007 and 2009, trust in central governments and banks reached an all-time low. This environment prepared the perfect breeding ground for alternative currencies. Bitcoin’s white paper is called “Bitcoin: A Peer-to-Peer Electronic Cash System.” If you are interested in the technical basics of Bitcoin, the few pages of this text are absolutely required reading. Not without reason, this whitepaper is considered the founding document of all cryptocurrencies. It bundles various concepts and designs a decentralized transaction system for digital money that excludes fraud and thus functions entirely without trust. Central parties such as banks no longer play a role in this system, as transactions are transferred from person to person. Not only Bitcoin, but in principle the entire crypto universe is based on this system.
Bitcoin.org was registered as a domain name on August 18, 2008. On October 31, the link to the whitepaper reached the readers of a cryptography mailing list. The sender was a certain Satoshi Nakamoto. It has not yet been possible to clarify who is behind this name. One theory is that it was a group of people, but individuals have also been brought into play time and again. However, they all denied being Nakamoto.
The child learns to walk: The Launch of Bitcoin
The white paper laid the foundation for the work on Bitcoin that would eventually bear fruit on January 3, 2009. On this day, Nakamoto created the first Bitcoin block, the so-called block number 0 or Genesis block, and received a reward of 50 Bitcoin for it. Embedded in the Genesis block was the Times headline of the day (“Chancellor on brink of second bailout for banks”) – a small dig at the banking crisis of the day. One of Bitcoin’s early supporters and contributors, programmer Hal Finney, received the first transaction of 10 Bitcoin from Nakamoto on Jan. 12, 2009. If reports are to be believed, Nakamoto mined up to 1.1 million Bitcoin in the first seven months.
Immediately after the launch, mainly a handful of computer geeks were interested in the project. That gradually changed in 2010, when the alternative currency was first used for its intended purpose. On May 22, 2010, Laszlo Hanyecz bought two pizzas for 10,000 Bitcoin. Another milestone in Bitcoin history followed on July 18 of the same year, when Mt. Gox became the first to allow Bitcoin exchanges. At that time, one Bitcoin still cost a manageable 6 cents.
Part 2: From drug money to official national currency
Behind Bitcoin lies a fascinating history that is rich in doubters and enthusiasts to this day. However, the fact that the cryptocurrency has long since shaken off its niche existence and become part of the financial mainstream clearly speaks for Bitcoin proponents.
Bitcoin in twilight
Opinions differed widely after the launch. While some saw Bitcoin as nothing less than a revolution in the financial system, others thought the digital currency was just a gimmick that would soon be forgotten. As always when something new emerges, there was naturally a lot of rejection. There is no overarching authority that would control Bitcoin, so anyone can use it, including criminals of course. Starting in 2011, Silk Road became one of the most visited sites on the darknet. Whether trading drugs, weapons or credit card data: The black market on Silk Road flourished – and Bitcoin, as an anonymous and secure means of payment, played a major role in this. The increased demand could also be seen in the Bitcoin price, which rose from one to over 30 US dollars in a few months after Silk Road’s launch.
This run attracted the attention of the FBI and the US government. As a result, Silk Road was forced to close in October 2013 and its founder was jailed for life. His spectacular conviction showed that Bitcoin’s suitability as a “criminal’s currency” was limited. Although it was not possible to determine who was behind each transaction, the transactions themselves could be easily tracked. Anyone who trades in Bitcoin leaves a transaction trail in an unchanging high-security network. So there is a good reason why the Italian mafia, for example, still prefers cash. Many studies suggest that Bitcoin is used for criminal activity at about the same rate as traditional currencies. A study by MIT estimates that about three percent of all Bitcoin transactions made are criminal. However, a significant increase in criminal Bitcoin transactions could be seen in the Corona pandemic, as strict measures made the transportation of cash much more complicated.
Between flights of fancy and hangovers
The history of Bitcoin can largely be read from its price trend. Anyone who looks at it can really only speak of a grandiose, but anything but smooth success story. The cryptocurrency, which many initially thought was a joke, was initially quoted at a few US cents. In November 2021, Bitcoin reached its all-time high of 68,789.63 US dollars. This development illustrates not only grown trust, but also the spectacular hypes around the digital currency, which were followed by crashes again and again.
The Bitcoin price tends to be particularly volatile. They are often caused by news, such as in 2017 when CME Group Inc. announced a futures contract for Bitcoin. This was the first Bitcoin-related financial product backed by a regulated U.S. financial institution. In 2017/18, there was a real crypto euphoria, which attracted many scammers and encouraged numerous startups to throw their own coins on the market. In 2018, the crypto bubble burst, causing the bitcoin price to fall from a high of around $20,000 to below $4,000. This massive shift in sentiment spelled doom for many of the fledgling ICO tokens.
A similar digital gold rush got underway in 2020/21 as cheap money from central banks sought investment opportunities in the wake of the Corona Shock. By then, Bitcoin had long been part of a diversified portfolio for many investors. On the Internet, but also in physical stores, Bitcoin was increasingly used as a means of payment. Large companies such as Tesla now found the courage to invest considerable sums in Bitcoin. Straightforward trading platforms like Coinbase made it easier for users to trade coins. All these developments strengthened the global acceptance of Bitcoin.
The Highlight So Far: Official Currency in El Salvador
The fact that more and more established payment services are integrating Bitcoin underlines the growing trust. PayPal, for example, offers trading with various cryptocurrencies and allows Bitcoin as a means of payment in more and more countries. Mastercard has also long recognized that the digital currency is too big to continue to exclude. The more major players open up to Bitcoin, the more acceptance grows and with it user confidence. However, blockchain technology is more than just a splash of color in the traditional financial industry.
What once seemed unthinkable is now a reality: since 2021, Bitcoin has been the official means of payment in El Salvador. Behind this step is the young president Nayib Bukele, who calls himself the “CEO of El Salvador.” He associated Bitcoin with the hope of attracting major investors from the tech industry and creating new jobs. In the Central American country, where many citizens do not have their own bank account and young people in particular easily slip into crime, the new payment option was supposed to lead to greater equality. In fact, many residents downloaded the Chivo app, but mainly to collect $30 worth of Bitcoin, which the government gave away to citizens as a starting credit. However, the hoped-for widespread take-up failed to materialize.
Part 3: What could Bitcoin’s future look like?
Everyone would like to know what kind of future Bitcoin is facing. Even if no one is in possession of a magic crystal ball, some considerations can be made. In this article, we will look at Bitcoin’s strengths and weaknesses, and then at the opportunities and risks that could characterize the future environment.
Probably Bitcoin’s greatest strength is the blockchain technology itself, which has proven immune to attempts at manipulation. Bitcoin is a peer-to-peer network, meaning that transactions take place exclusively between the sender and the recipient. They alone determine the value at which the transaction takes place. Third parties such as banks have no access whatsoever, so Bitcoin is completely decentralized and resistant to censorship.
The mother of all cryptocurrencies is independent of traditional financial institutions, so that a banking crisis, for example, would not have to worry Bitcoin investors very much. Another strength is anonymity, because the identities of buyers and sellers remain secret in Bitcoin transactions. More and more applications based on blockchain technology are coming onto the market. This shows that even more than ten years after the launch of Bitcoin, its potential is far from exhausted.
One weakness is closely related to one of Bitcoin’s greatest strengths, which is security. When you hold your own non-custodial wallet, you are completely independent of third parties. This means maximum responsibility, because if you lose your seed phrase, there is no one to turn to. There are many early Bitcoin investors who are millionaires in theory, but have none of that because they can no longer gain access to their wallets. Users eliminate this risk by relying on third-party custodial wallets, even if it means giving up a good bit of their independence.
The poor energy balance of Bitcoin is also increasingly coming into focus. Bitcoin mining requires enormous computing power, which eats up vast amounts of energy. Since, from a global perspective, fossil fuels are primarily used for energy production, mining has become a negative factor for the climate that should not be underestimated. In view of much more climate-friendly mechanisms such as proof of stake, it is difficult to justify Bitcoin’s high energy consumption. Regulators are also blowing an increasingly rough wind here.
The trend toward digital payment is not expected to reverse again in the next few years. This development is likely to continue not only in rich countries, but could also affect many underdeveloped regions. They often lack banks, leaving large segments of the population without access to financial assets. However, to make transactions with Bitcoin, all that is required is a standard cell phone. The cryptocurrency could not only help open up new financial opportunities for weak regions, but also facilitate international transactions. Many guest workers in particular could benefit from this.
Regulation has always been a hotly debated topic in the crypto community. While it is a red rag for some, others emphasize its positive sides. One in particular is obvious: When the state regulates Bitcoin, it does not stand in the way of its success (as is the case in China, for example), but gives it a clear framework. This, in turn, is crucial for institutional investors such as asset managers or pension funds to be able to invest in digital assets. It is primarily these large players that move the market and create demand that could support the bitcoin price in the long term.
The Bitcoin price is tremendously volatile. One piece of bad news, such as the bankruptcy of the crypto exchange FTX, is enough to send the price plummeting. However, the exaggeration also works in the other direction, for example in the form of a cryptic tweet by Elon Musk, which leads to a price fireworks. For traders, this dynamic is appealing. Long-term investors, on the other hand, who are primarily concerned with value preservation, are put off by it. The situation is similar for many customers who do not want to rely on a currency that may have lost purchasing power in the double-digit percentage range overnight. For the market, Bitcoin is still primarily a speculative object whose performance can only be compared with that of the euro, U.S. dollar and the like to a limited extent. Another stumbling block for the broad acceptance of Bitcoin are the often still high transaction costs and the long transaction times.
Even if blockchain technology becomes widely accepted, this does not necessarily mean that Bitcoin will benefit from it. It is difficult to forecast which cryptocurrency will hold its own in the long term. Some experts assume, for example, that Ethereum could replace Bitcoin as the most important cryptocurrency. The open question is whether Bitcoin developers will succeed in implementing groundbreaking updates or whether the currency could gradually lose its reputation as digital gold.
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