Bitcoin: How Did We Get Here?
Garrett Martin, Dartmouth Business Journal
A little over nine years ago, Bitcoin was born in an obscure corner of the internet to a pseudonymous father. In its short and volatile life, it has served to facilitate everything from pizza deliveries to murder, been both scorned and celebrated by the United States legislature and enthralled the entire world in a cypherpunk fever dream. Most recently, it has entrenched itself in the mainstream of culture and commerce in a whirlwind of giddy speculation. A look at Bitcoin’s past may illuminate its present. So where was Bitcoin before and why is it here now?
In early November 2008, a white paper detailing the design for a new form of digital currency was posted to a niche cryptography listserv by a mysterious “Satoshi Nakamoto”.” This was not the first proposal for a form of digital money. Precursors such as ecash, bitgold and b-money each tried and failed to liberate the world from the chains of corporeal currency. Appearing less than a month after the collapse of Lehman Brothers, Bitcoin was special in that it circumvented the troublesome issue of trust. Previous attempts to create digital currencies either relied on existing infrastructures or third parties to monitor a ledger of transactions in real time. Bitcoin, however, relied on a publicly distributed ledger called the “blockchain” in which a disparate network of computers would solve cryptographic equations to simultaneously maintain the ledger and create new Bitcoins.
The early years of Bitcoin were relatively muted, defined by a communal and amateurish spirit. Gavin Andresen, who would go on to become a founding member of the Bitcoin Foundation, created a site called Bitcoin Faucet where he literally gave away 10,000 bitcoins. In what is now Bitcoin mythology, a programmer in Florida paid 10,000 Bitcoins for two pizzas to be delivered in the first “real-world” transaction using the currency.
2011, however, was a watershed year for blockchain bucks. In February, Bitcoin reached parity with the dollar garnering mention in a couple of news outlets. Then, following an April 20 article in Forbes, Bitcoin went on a stratospheric run from $1.14 to $8.80 by May 26. In a testament to the principle that there is no such thing as bad press, an article in Gawker describing Bitcoin’s illicit applications published June e 1 spurred a further hike to $29.60 by June 8, followed by a steep drop until it was left oscillating around five dollars at the end of the year. This staggering performance caught the eye of many people from venture capitalists to government officials in the CIA and would be Bitcoin’s first taste of the limelight. Looking back, one can only see this as a foreshadowing of things to come.
Bitcoin’s growing reputation as the currency of the underworld led Senator Chuck Schumer to describe it as “an online form of money laundering” in 2011, but by the time the first Senate hearings regarding Bitcoin were held in 2013, the tone had shifted. Many senators and the FBI recognized Bitcoin’s potential for use as a legitimate currency and with this tacit approval from Washington, Bitcoin soared to new heights, breaking $1000.
After this surge, it seemed that Bitcoin had settled into a somewhat stable range between $200 and $700 at its extremes. That is until around mid-2017, when Bitcoin took the world by storm. As in past spikes, media coverage and the exponential power of hype certainly played a significant role, but there were other forces at work that had been germinating behind the scenes for some time.
During this intervening period of relatively light media coverage, people continued to mine Bitcoin, and the size of the distributed computing network continued to grow at a nearly exponential pace. A report by Tyson O’Ham of the Bitcoinist, posted on January 25th, 2016, detailed the staggering size and growth of the network, including the stunning statistic that the combined computing power of the Bitcoin network was about 300,000 times more powerful than the world’s fastest supercomputer. While not in the headlines, the network effect that drives the validity of any currency, was growing in the background.
Silicon Valley venture capital investment was simultaneously accelerating, rising from $2 million in 2012 to $600 million by 2016. This helped create a significant population with an increasingly significant interest in the success of the currency. While the tinder of capital, network strength and approval from Washington accumulated, another significant development in the crypto landscape ignited a combustible Bitcoin ecosystem.
This spark was the boom of Initial Coin Offerings (ICO). ICO’s are similar to Initial Public Offerings (IPOs) in that they are fundamentally a method for businesses to raise capital. By creating a digital currency (using publicly available computer code), a company can create digital tokens that either represent shares in the company or fund, or can be used to purchase some product or service. ICOs in 2017 ended up raising over 20 times more capital than they had in 2016. In the third quarter of 2017 alone, $1.32 billion worth of coin offerings were sold. In order to purchase these coins, investors cannot simply use conventional dollars, but instead must convert their dollars into digital currency. The standard currency of choice has been Bitcoin, meaning that the boom in ICOs created a dramatic surge in demand for this cryptocurrency. This demand shock necessarily led to a dramatic spike in the price, leading to a flurry of media coverage, the intangible fuel that sparked previous booms such as the one in 2011.
This past year, it seemed the stars had aligned for Bitcoin. A confluence of Silicon Valley capital, federal approval, and a steadily growing network served as fertile soil for staggering growth. This was further instigated by the development of ICOs as a funding strategy and the concomitant explosion of the cryptocurrency ecosystem for which Bitcoin would serve as the foundation. Media coverage, proportional to the astounding price of Bitcoin, would further fuel the frenzy as it had in 2011, until one coin would be worth nearly $20,000 at its peak. While the ride has been a wild one, as our cultural attention span is tested and the sluggish wheels of the federal government begin to churn toward regulation of ICOs and cryptocurrencies writ large, Bitcoin is likely headed towards a grand lull, but its impact, however, is unlikely to be forgotten any time soon.