In 2009, a man by the name of James Howells proved himself to be a visionary. He started mining Bitcoin before anyone else had ever heard of it.
James managed to stockpile 7,500 bitcoins when they were just a fraction of a cent per coin.
Eventually his girlfriend made him stop. She thought that the computer doing the mining was “getting too noisy“.
James later ended up throwing the hard drive in the trash. And today, this mistake cost him over 400 million dollars.
“To get your money, you would need that hard drive. Yeah, there’s a specific file on that hard drive, uh, called a wallet file, which the Bitcoin is stored in. Um, and without that file, uh, there is no way of getting the money back because there is no central, central server that records a log of it“.
In 2010, Laszlo Hanieks bought two pizzas for 10,000 Bitcoin, or about 35 at the time.
It wasn’t the first transaction in Bitcoin, but certainly the most widely publicized.
And fortunately today, these delicious pizzas cost him half a billion dollars.
“Is it true some people celebrate, celebrate the, the anniversary of the day you bought the pizza?“
“Yeah, May 22nd, Bitcoin Pizza Day, so I..“
“It’s really, it’s called Bitcoin Pizza Day“
It’s stories like this that make Bitcoin such a fascinating phenomena.
Its growth and adoption, at least over recent years, has been mind blowing.
But the story of how Bitcoin came to be is just as interesting. Despite Bitcoin’s young age when compared to traditional stores of value, the fundamental ideas behind crypto may be older than you think.
So the question has to be asked, where did Bitcoin actually come from?
Who is the mysterious individual who invented it?
Sit back, relax. In this two part series, we’ll find out
Where Did Bitcoin Actually Come From?
For many Bitcoin is still considered a fad, a Ponzi scheme, something that will disappear as quickly as it materialized.
The cryptocurrency has has its fair share of bad reputation through fake crypto frauds, such as Bitconnect and One Coin. Not to mention payment for narcotics on Silk Road.
“What’s happening is there’s all these copycat cryptocurrencies that are going out there and there’s no regulation on the, on the actual level of Bitcoin itself. You’re talking, yeah, there’s futures regulation, but the underlying asset is completely unregulated. It’s a dark market“.
“Bitcoin is worthless artificial gold. Which if it succeeded would result in a lot of illicit activity“.
But the word is starting to get through that Bitcoin is much more than that. People are starting to look at our economic system with increasing skepticism.
Currency is continuously being created. Food prices and bond yields are rising, hinting at inflation.
And knowing that the long term value of all fiat currencies over the last few thousand years has tended towards zero, it’s only natural to think that there may be some issues ahead.
We all need to understand financial problems and How Money Is Created (you can find other sources to learn about this, or we’ll talk about it another time and I’ll link to it here).
But it clearly highlights that there’s a need for new thinking on the topic.
Friedrich Hayek, winner of the 1974 Nobel Prize in Economics, stated the following in 1984 :
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government. All we can do is by some sly roundabout way introduce something that they can’t stop“.
While it’s undeniable that Bitcoin is not perfect, it broadly achieves this goal. And as you’ll soon see, It can’t be stopped.
So before we continue, it’s probably wise to have a quick primer on Bitcoin. You can learn this on another sources, but here’s a quick summary :
A Quick Primer On Bitcoin
When you pay a shop using a bank card, the shop checks with the bank to see if you have money to make the purchase.
The bank checks its records, verifies that you have enough money, and deducts that amount from your card. It then updates its records and takes a fee for providing their services.
If you wanted to remove the banks from this system, who would you trust to keep the records straight?
No altering or cheating.
No one would ever trust a single person with that much power. But you may give your trust to a collective group of people. Many millions, in fact.
The main idea is to not have a centralised record of transactions. Many copies of those transactions are distributed across the world.
Every owner of each copy records every transaction.
In this new model, the shop, instead of checking with the banks, checks with everyone’s records to see if you have the money.
When the purchase is made, all the record keepers update their records.
If an individual transaction record is fraudulent, it doesn’t agree with the rest of the copies of the transaction records and gets rejected.
This large group of people checking record transactions aren’t people at all, but a network of computers.
There is no need for third parties, such as banks, because the decentralized network keeps itself in check.
Amazingly, that means no bans, no server shutdowns, or blocking of payments, because payments occur directly between people.
Although transactions can be tracked, They cannot be stopped.
So called miners keep the network running by solving complex equations on their computers. These people mine Bitcoin in chunks called blocks that contain all of the recent transactions.
Blocks are kind of like a page in a record keeping book.
The miners receive payment in Bitcoin for their effort, much like mining gold.
Also like gold. There’s a finite supply of Bitcoin to stop it from being devalued, much like we’re currently seeing in fiat currency.
There will only ever be 21 million Bitcoins, and the final Bitcoin will be mined in 2140.
So what gives Bitcoin its value?
In reality, it’s just worth what someone’s willing to pay for it.
So could the price drop to zero?
If confidence is lost, yes, it’s possible.
But regardless, it is a pretty interesting idea. There’s an argument to be made that the value of Bitcoin is actually the trust and utility of the Bitcoin network itself.
What the price is for that value, no one is sure yet.
“So, yeah, I think a really useful idea, a blockchain is just a type of database. It’s a distributed ledger that, that in some use cases, like for a banking back office, It’s kind of like a database upgrade. So, massive improvements in efficiency, um, but, but probably not that transformative or disruptive. When you take a blockchain and you make it public and decentralized, and then you add money to that, you add a cryptocurrency, then you’re looking at something that, um, is, is that first use case, that offshore banking system, that I think is fundamentally disruptive. And, and disruptive financially, economically, and even potentially politically“.
How Is Bitcoin Maintained?
So how is Bitcoin maintained? Bitcoin is open source, so anyone can edit the code.
It’s a misconception that the code has stayed the same for the past 10 years. There’s maintenance carried out to ensure smooth functioning.
This is done through a Bitcoin Improvement Proposal, or BIP. A BIP is just a document that proposes core changes.
But to stop someone from inserting some code that says, say “give every Raja Tips readers a thousand bitcoin“, there needs to be 95 percent consensus across the last 2,000 miners.
Basically, it’s a digital voting system.
A Hidden Clue
On January 3rd, 2009, the first block of Bitcoin was mined. Within this very first block, a special message was written. It read :
“The times. 3rd of January, 2009, chancellor on the brink of second bailout for banks“.
This gives us a clue to Bitcoin’s purpose for existing a response to a broken financial system.
Just nine days after the first block was mined, the first Bitcoin transaction is completed.
It was between Bitcoin’s creator, Satoshi Nakamoto, and another cryptographic enthusiast, Hal Finney.
It was a healthy sum of 10 Bitcoin. Worthless at the time, as there were no exchanges to determine a price.
Satoshi Nakamoto would announce his invention of a new economic system on a cryptography mailing list on July 9th, 2009.
Hal Finney would help Satoshi fix bugs and improve security in those early days.
While these steps mark Bitcoin’s creation and the first instance of application, this is by no means the beginning of Bitcoin’s story. For that, we must travel back over two decades to the year 1983.
Bitcoin’s Grandfather – David Chaum
They were activists who defended the idea of using cryptography and computers as a powerful tool to protect the privacy of individuals. If you were to put it into political terms, they were kind of like digital libertarians.
David wanted to create a safer and more anonymous transaction system. His efforts led to the invention of the Blind Signature Protocol, breaking ground on what would become known as the foundations for modern blockchain technology.
“I created a whole, a concept for how you could use e cash to make your payments, and then the blind signatures could be used to basically prove things about you without revealing who you are. Classics, say, if a kid’s at a bar and they want to, or somewhere they want to get in, they would Say, to prove that they have a, they’re old enough or they have a driving license or they’re from a different state or whatever, but they don’t want to give their address and all this other stuff. Well, that, that’s what you could do with a credential mechanism“.
In the years that followed, David Chaum began building his idea of a workable cryptographic electronic money system.
And in 1989, the company DigiCash was born.
A notable employee at DigiCash was cryptographer, Nick Sabo. Nick would go on to be influential in the early crypto space, but more on him later.
In 1993, DigiCash launched their eCash system, a product that enabled the safe and anonymous transfer of money over the internet.
eCash was David’s answer to what he considered to be the extremely unsafe practice of using credit cards online.
According to insiders at the time, eCash was a technically perfect product that resolved many of the issues that came with credit card payments, such as security concerns and fees.
Despite his good intentions, what David was doing was risky at the time because the U.S Government sensed a threat.
“A number of my, uh, colleagues and friends had secrecy order placed on them by the United States government, which made it a federal crime to, uh, reveal what they were researching. But, you know, cryptography seemed, uh, a bit out of range. The National Security Agency, which is our main Cryptographic, uh, authority in the United States, you know, for protecting secrets and breaking codes, uh, they, uh, got a new director, and he started writing letters to all the scientific associations telling them that they should not have Conferences or even sessions at conferences covered cryptography“.
“I felt it was just too important so I risked spending the rest of my life in jail to set cryptography free“.
Digital cryptography was so frowned upon that some early crypto enthusiast had to smuggle code through shirts or tattoos.
Much like Bitcoin, the eCash product began gaining incredible levels of attention from buyers. At the height of the hype, David Chaum was contacted by none other than Bill Gates.
Gates wanted to integrate eCash into every copy of Windows 95.
It’s rumored that he offered 100 million for the project. David Chaum declined the offer, and every other offer that came after that.
According to ex employees, David’s stubbornness and paranoia made it hard for him to trust the intentions of those interested.
He also assumed that there’ll be better offers around the corner. He wanted eCash to be perfect. He believed in the importance of his work.
In 1996, he stated :
“The difference between a bad electronic cash system and a well developed digital cash will determine whether we have a dictatorship or a real democracy“.
Due to infighting, David eventually lost control of DigiCash and the company fell into the hands of external investors.
DigiCash began pitching their products to banks, several of whom were interested, but the vast majority of banks at the time were conservative and would rather stick to lucrative credit cards rather than an experimental product.
By 1998, DigiCash was bankrupt. Signaling the end of the very first wave of digital currency.
The Underground Crypto Boom Of The 90’s
It seemed like the world was just not quite ready for electronic crypto money, but this did not stop progressive thinkers from seeing potential in the idea.
After all, it wasn’t the idea that was bad, it was just well ahead of its time and had the added issue of having no strong leadership.
In 1999, famous economist Milton Friedman even said that, “an electronic cash was necessary for the newly found internet and was also a logical tool for limiting government overreach“.
“I think that the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e cash. A method whereby on the internet you can transfer funds from A to B. Without A knowing B or B knowing A“.
He would go on to say that the monetary supply and monetary policy should be set by a computer where it could not be corrupted by humans.
In the mid 1990s, the market exploded with companies that were based around cryptographic money. There were all riding the wave of attention that Digi DigiCash had generated.
In 1996, even the NSA got in on the action, they published a paper titled “How to Make Mint, the Cryptography of Anonymous Electronic Cash“.
They described their own, fairly impressive version of a cryptocurrency. But it proposed the need for a centralised bank to keep tabs on transaction records, going directly against the heart of the movement.
The movement did continue, and before long, some intriguing ideas began popping up on message boards.
Some of these ideas were very valuable to what would later become Bitcoin.
B-Money for example, was designed by a University of Washington graduate, Wei Dai.
Published in 1998, B-Money was designed as a way to enable online economies to exist entirely free from outside regulation.
B-money was ultimately theoretical, and while popular, it never gained enough traction to become a reality.
Other ideas within the online community were less helpful. Jim Bell’s assassination politics essay, for example.
In the essay, he proposed an encrypted currency system to be used by disgruntled citizens unhappy with their political representatives.
Money could be anonymously donated to a pool until the amount was high enough for someone to accept the bounty and assassinate a politician.
It was a concept that eventually led to Bell doing some prison time.
In all of this chaos, the idea that stands out most in hindsight is Bitgold, proposed by ex DigiCast employee Nick Szabo in 1998.
Nick had the idea that instead of a digital currency being a token that represents fiat money, the digital currency itself could be a valuable commodity, and it would be awarded to miners for completing cryptographic equations.
Where Bitgold differs from past attempts was the complete distancing from any reliance on banks.
Nick Szabo explains :
“I was trying to mimic as closely as possible in cyberspace the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority“.
If David Chaum’s e cash was an early ancestor to bitcoin, then bit gold was the missing link.
Although it was an establishing building block for the future of cryptocurrencies, it was only theoretical and also flawed.
For one, it had far less concern with privacy and also had some technical shortcomings when it came to mining.
So along would be money, Bitgold was never widely adopted.
So then, despite all of its exciting progress, the cryptographic money community fell relatively quiet for a decade.
Bitcoin Finally Arrives
Then, in August of 2008, the domain name Bitcoin.org was anonymously registered.
In October, a paper titled, Bitcoin, a peer to peer electronic cash system, was posted to a cryptography mailing list, signed, Satoshi Nakamoto.
In this paper, Nakamoto presented to the world the fundamental outline for Bitcoin.
As it stands, this paper started a cryptographic chain reaction that changed the course of financial history.
Today, nation states want to start their own digital currencies. The city of Miami wants citizens to be able to pay bills in Bitcoin.
“To be able to offer our employees to get a percentage of their salary in Bitcoin, allows our residents to pay for fees, uh, in Bitcoin, and also would allow, allow for taxes to be paid in Bitcoin. It also, a request of the state legislature, to make Bitcoin, uh, an acceptable currency for us to potentially invest in in the future“.
PayPal, Mastercard, and Apple Pay are now integrating Bitcoin. Tesla has bought 1.5 billion dollars worth of Bitcoin and General Motors is contemplating putting Bitcoin on its balance sheet.
Large financial institutions are now accepting exposure to Bitcoin.
What separated Bitcoin from past attempts was the overcoming of the double spending problem.
Unlike physical stores of value, digital money is simply data and data can be replicated and this allows the potential spending of a single coin multiple times.
In the past, this issue was solved by involving a trusted third party to oversee transactions.
In the case of eCash, that third party was banks.
But to Nakamoto, that defeated the point. And much like Nick Zabber attempted with BitGold, the intention with Bitcoin was to create “a system for electronic transactions without relying on trust“.
Bitcoin succeeded in overcoming the double spending problem by implementing an updated record of who owns what and at what time, as discussed earlier.
This was the birth and implementation of the blockchain.
With the double spending problem solved, the system was brought online and tested, and it worked.
By 2009, Bitcoin was up and running.
In July of 2010, it began trading at a value of 0.0008 US dollars, and had risen to 0.08 dollars by month’s end.
But of course, nobody really cared. Here’s the very first Reddit post about Bitcoin in 2010 :
It was down voted.
The first reference of Bitcoin in TV history was the program, Good Wife, In 2012. When Bitcoin was at a price of $3 and 41 cents.
Here’s a talk about Bitcoin to an empty room in 2013 when it was at a hundred dollars (literally nobody cared here) :
“What does Bitcoin neutrality mean? Neutrality in Bitcoin means being able to adopt Bitcoin in any culture, any language, any religion, any geography“.
But there were some believers though. Chamath Palapatiya shares his views on Bitcoin at 135 dollars.
“Owning that currency and allowing water to find its level, particularly in the developing markets, is huge. And if you don’t think that this thing is going to rip when Brazil goes through devaluation, when the Indian rupee continues to get crushed, when you have all of this money trying to get in and out of these countries where there’s massive, you know, political instability or monetary or financial instability, you’re being naive. It doesn’t matter what happens in the United States. It doesn’t matter what happens in Japan. It doesn’t matter what happens in the EU. It doesn’t matter. It matters what happens in Argentina, in Venezuela, in Kenya, in Brazil, in India, in Russia, in China. And when you look at where all the activity is, it’s in all of those markets. This will be born out of a people’s desire to have unfettered access to capital“.
Despite finally cracking the code to a working electronic cash system, Satoshi Nakamoto has mysteriously chosen to remain completely anonymous.
On April 26, 2011, Satoshi Nakamoto would send his final verified email and vanish. Satoshi still owns a million coins which have never moved from his digital wallet.
If the price of Bitcoin was to reach 197,000, it would make him the richest person in the world.
So Satoshi Nakamoto, being such a mysterious figure, has fueled speculation and false claims.
Who is Satoshi, and why did he vanish?
We’ll explore this, as well as some concerns about Bitcoin, in the next article in this blog.
Thanks for reading, hope you get some insight from it.
Source : Coldfusion TV YouTube Channel.