A brief history of Bitcoin: 2008–2014
Welcome to Coincub’s series on everything Bitcoin. Today, we’re taking a look at the first six years of Bitcoin, from 2008 to 2014.
This is the first post in a two-part series, so stay tuned for our coverage of 2015 to the present.
At the time of writing, Bitcoin has been around for a little more than a decade. It came from humble origins as a paper shared on a niche cryptography mailing list. Very few could have predicted that it would spawn a multi-billion dollar industry. Unsurprisingly, Bitcoin has generated controversy every step of the way.
To understand Bitcoin’s position today, it’s helpful to get a brief overview of where it’s been. The story has heists, hackers, and a shadowy cryptographer at the heart of it all. Whatever the history of Bitcoin is, it’s rarely boring.
In the beginning, there was inflation.
To set the scene for the invention of Bitcoin, we need to go back to 2008. The worst financial crisis since the Great Depression has gutted the global economy. Trust in central banks is at an all-time low. To prevent complete financial ruin, central banks begin to use, among other strategies, quantitative easing.
Quantitative easing (QE) is a monetary policy used by central banks to stimulate the economy. By buying longer-term securities, the domestic money supply is effectively increased.
Detractors uncharitably referred to this as “printing money”. They argued that QE can result in the devaluation of domestic currency and inflation without economic growth.
At the same time, a cryptographer and programmer known as Satoshi Nakamoto was working on a new type of digital currency. According to Nakamoto’s vision, Bitcoin would end the need for third parties and cut out banks entirely. The website bitcoin.org was registered on August 18, 2008, via an anonymizing domain broker.
The focus on anonymity and privacy was unsurprising given Nakamoto’s connection to the Cypherpunks.
Your average Cypherpunk was technologically literate, interested in mathematics and politics, and had a passion for privacy and free speech. Cryptography, the mathematical and computational discipline of creating and breaking codes (more on that in a later post) figured large in their ideology.
Cypherpunks believed that the wide use of encryption in online communication was the best way to protect free speech and combat centralized control of the internet. If you’re interested in learning more about the Cypherpunks, there’s a classic article in Wired published in 1993.
The Cypherpunks were interested in making a form of digital currency that could not be controlled or surveilled by the state or centralized banks. Before Bitcoin, several attempts were made to create a viable form of private digital money, like David Chaum’s DigiCash, Mojo Nation for file sharing, and Adam Back’s anti-email spam service HashCash.
Nakamoto published the Bitcoin whitepaper on a Cypherpunk mailing list called metzdowd.org in 2008 and changed the financial world forever.
Bitcoin was able to solve several of the problems associated with earlier currencies and became a hit because of it. The first bitcoins were mined around January 3rd, 2009. The first-ever transaction in the genesis block, called the ‘coinbase’ transaction, contained the following text:
The quote functions both as proof that the first block was created in January 2009, and a rather disapproving comment on the fractional reserve banking system. The Bitcoin protocol caps the total number of coins in existence at 21,000,000. Quantitative easing is not a strategy that can be applied to Bitcoin.
The first widely documented bitcoin transaction involving physical goods happened on May 22nd, 2010, when a Florida man paid a forum user 10,000 BTC to buy him two pizzas. May 22nd is now a holiday for Bitcoiners known as Bitcoin Pizza Day.
A few months later, Satoshi Nakamoto disappeared without a trace. Over 10 years later, no one has heard from Bitcoin’s founder, although there are plenty of theories about who they might be.
The rise of Bitcoin was accompanied by the formation of an ideology.
Bitcoiners advocated for decentralization, self-sovereignty, and a truly free market. The organizations that adopted Bitcoin at first tended to be located at either the forefront or the margins of society. Silk Road, a darknet market launched in 2011, conducted all trades using Bitcoin. After several major payment platforms ended support, WikiLeaks started accepting donations in BTC.
The Bitcoin Foundation was established in 2012 to promote the development and uptake of Bitcoin.
By 2013, Bitcoin had become established enough to attract the attention of American regulators and hit $1,000 USD for the first time. The first Bitcoin ATM opened in Vancouver, and the People’s Republic of China started the first of many crackdowns on Bitcoin usage. Chinese financial institutions were prohibited from using bitcoins in December, ending the year on a low point.
In 2014 The U.S. Commodity Futures Trading Commission approved Bitcoin-based derivative products, signaling increased acceptance of Bitcoin as an asset class.
We’ll round out part one with a look at one of the defining catastrophes of Bitcoin.
This one was so bad it nearly tanked the whole project. Yes, I’m talking about the Mt. Gox debacle.
Bring up Mt. Gox to an experienced Bitcoiner and you’ll likely get an interesting reaction. In 2014, Mt. Gox was the biggest Bitcoin exchange on earth and handled 80% of all transactions. There had been hints of trouble in 2011 when hackers were able to make off with the equivalent of $8.75 million. The exchange was acquired by programmer Mark Karpeles at around the same time.
The real disaster struck when papers leaked showing that Mt. Gox was insolvent due to the theft of 850,000 bitcoins over a span of several years, and the disappearance of several thousand others. At the time, the bitcoins stolen by hackers were worth $460 million. The bitcoins that just up and disappeared were worth another $27.4 million. The price of Bitcoin dropped by 36% in the months following the disclosure, with some naysayers arguing that the end of Bitcoin was nigh.
Creditors were locked into a legal battle that’s still ongoing, and many have never gotten their bitcoins back.
2014 was a dark time for Bitcoin, but there were a few positive events. Newegg, Dell, and Microsoft began accepting bitcoin. Despite claims to the contrary, Bitcoin was very much not dead.
Tune in next time to read about Bitcoin’s history from 2015 to the present.
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