How bitcoins have grown and have become big money

Depending on how his birth is counted, bitcoin turned 10 today. The first lines of code were assigned to the bitcoin blockchain on January 3, 2009, a few months after the original white paper was published. These lines of code, known as the "genesis block", are credited to the person or persons known as Satoshi Nakamoto.

On January 12, Nakamoto sent 10 bitcoins to Hal Finney, and a new financial counterculture was born. At this point, the value of the bitcoin was negligible. Users have essentially exchanged bitcoins as a reward for positive comments in the forums. The first "real" transaction took place on May 22, 2010. Laszlo Hanyecz bought two pizzas for 10,000 bitcoins or about $ 30. (At current prices, 10,000 bitcoins would be worth $ 38 million.) I hope the pizza is tasty.)

For most of his life, the bitcoin has formed from three major overlapping communities: the small community of original investors and true believers, blockchain technology enthusiasts and speculators who are only here to Earn something, lady. Lately, another community has emerged: types of antiquated heavy finance.

Originally, bitcoin was money with a philosophy: in place of a central bank, it had a schedule and Nakamoto's white paper, both suggesting skepticism about ordinary financial institutions. But Nakamoto vanished. As the digital currency took off, the system that should have worked without trust developed problems of trust. And while the bitcoin price has increased, it has become another investment vehicle for the financial system that was to replace. 10 years later, the bitcoin is part of the system that it intended to overturn.

If you had asked me 10 years ago, I would not have imagined finance he could have a counterculture. But in 2008, while the banking crisis was in full swing, a group of anarchists, libertarians and other dissatisfied true believers of technology created one. (There were other digital money attempts, but none of them took off.) In August 2008, someone registered bitcoin dot org as a domain; at Halloween, that year, a document described a decentralized system for electronic transactions he did not rely on trust. Start the original white paper by Satoshi Nakamoto (emphasis on mine), "A purely peer-to-peer version of e-money would allow online payments to be sent directly from one side to the other without going through a financial institution".

You can see the influences of the banking crisis on bitcoin ideology: first of all, it is a specific distrust of financial institutions. Beyond any number of other breaches of trust that occurred during the financial crisis, a money market fund called the primary reserve fund did something very scary: it broke the dollar. If you had invested $ 1, you would have gotten back 97 cents. This was due to the fact that the money market fund had invested in Lehman Brothers, a financial company that had just gone broke.

Money market funds, at the time, were considered as safe as a real savings account; $ 3 trillion had been invested in them as of September 2008, according to USA Today. But they are not as secure as savings accounts, which is why they have had better rates of return – as investors have discovered, to their surprise and dismay. (The regulations concerning money market funds have subsequently changed).

The contamination from Lehman's bankruptcy has spread to the broader financial markets, clarifying how closely the banks were tied together. There are several ways to respond to this: one is to strengthen financial regulations, change the system and let it work, hopefully in a more stable way. Another answer is to create a new system without these specific risks. All of a sudden, many people were of the right mood to take bitcoin seriously.

Bitcoin highlights how fundamentally bizarre money it is. In a sense, money is not "real" in the way it is a tree. It is a human invention, a token of value that facilitates exchange. But it is quite real – people fight and die for this, empires fall for lack of it, and I personally would go homeless if I did not use it to pay rent. Money is like Tinkerbell in Peter Pan: it's real if enough people believe it. And in 2009, many people were looking for alternatives to the mainstream financial system that had failed catastrophically. The core of the banking system, as most people understand it, is money. But how is the money when bankers are taken away? Of all previous Internet-based currency attempts – and there have been many – bitcoin has been the one that has broken out as the best possible alternative to society's collective anxieties around the financial system.

Bitcoin is structured in a way that reveals its ideology. The idea of ​​a peer-to-peer monetary network goes back to the old Silicon Valley riots. You do not have to pay a fee to send money to a third party such as a bank or Western Union. But the original ideology is even more radical: if you believe that the state is simply a force designated for violence, then it is also possible to believe that the legal currency – for example the dollar – is a forced state monopoly. Bitcoin overturns that monopoly, serving in part as a currency-based way to hate the government.

Even the term "mining" conveys a little of this thought: many investors consider bitcoin a commodity, like gold. (We're looking for genuflexes to the gold standard and we keep moving it.) There's also the finite nature of bitcoin: under the current protocol, there can only be 21 million bitcoins in the world. More than 17 million have already been extracted. The rest will be released at a predictable mining rate, which has slowed down as supplies increase. No central bank or president can make the system work faster or with inflation to adapt to its political program.

The other key technology to dodge banking institutions – and the state – is the distributed ledger. Anyone can access the public parts of the "blockchain", a ledger of all transactions carried out over time. No institution, at least in theory, is required to ensure reliable transactions. If you can keep your wallet anonymous, you do not even need to know who you are.

But as the last decade has made clear, removing trust as a component in a part of the financial system means that problems of trust are manifested somewhere else, and that is how the counterculture was formed. To make sure your bitcoin investment was worth it, you had to convince others that the investment was also worth it. The Bitcoin communities were born on platforms such as IRC and Reddit.

The most significant community for the early bitcoins, however, was the dark Silk Road market. Founded by Dread Pirate Roberts, who would later be revealed as Ross Ulbricht, Silk Road's promise was essentially libertarian. The idea was that everything could be exchanged, regardless of whether the state considered it legal. Trade was dominated by marijuana, fake documents, benzos and other prescription drugs that were all facilitated by bitcoin. When the Silk Road was seized by the US government in 2013, that seizure included 144,336 bitcoins that belonged to Ulbricht.

The closure of Silk Road was the end of the bitcoin. Perhaps it was the moment when it became clear that removing financial institutions from money did not necessarily mean a more reliable environment, and did not guarantee the protection of the state. When Mount Gox filed for bankruptcy, it would consolidate bitcoin's trust problems.

Gox ("Magic: The Gathering Online eXchange") was not originally founded for bitcoin, but launched a bitcoin exchange at the beginning of 2010. Mt. Gox allowed people to buy bitcoins and sell using wire transfers banking; in 2011, its founder, Jed McCaleb, sold it to Mark Karpelès. The first years of the Monte. Gox showed that online currency brought new risks: "hacks, interruptions, a conflict with the US government and a $ 75 million lawsuit," wrote Adrianne Jeffries for The Verge.

Gox filed for bankruptcy in 2014 after customers complained that they could not withdraw their bitcoins. His failure could have been catastrophic; Mt. Gox was responsible, according to some estimates, for 70% of all bitcoins exchanged in February 2014. "Behind the scenes", Jeffries wrote, "Karpelès had discovered that an attacker had slowly dried up the whole of the mountain. The company filed for bankruptcy in February 2014, citing $ 64 million in liabilities. "Bitcoin's price skyrocketed in the following years, which allowed it to collect at least some of the creditors at it was in 2014, but this was not the real problem. Bitcoin's promise was that your money would not be held hostage by a bankrupt bank, but that's exactly what happened.

Gox and other exchanges work essentially as the bitcoin version of the commodity exchanges, simplifying the bitcoin trading experience. They allow people to set the rate for bitcoins (and other cryptocurrencies), switch from fiat currency (issued by the state, such as dollars) to cryptocurrency, and buy and sell cryptocurrencies. Their existence has made it easier for ordinary people to get into bitcoin, and they have also brought new types of security risks. Some of the Gox problems had previously harassed successive exchanges like Coinbase and suggested that digital money had new problems that paper-based money did not have. While you could enter my home and steal the $ 40 sitting next to my laptop, this is an intense time for a small reward. Calculating how to affect exchanges, however, could lead to tens of millions of dollars from a single violation.

Banks and regular exchanges are not immune to hacking, but they pour money to become harder targets. Bitcoin exchanges, however, "may not have had the capital at hand, time, or even the technical ability to increase security capabilities fast enough to ward off potential attackers," said John Sedunov, an assistant professor of finance at the University of Villanova The Washington Post in 2018.

But also like Monte. Gox broke up and the Silk Road was caught, the bitcoin continued to enter the mainstream. At the end of 2014, Microsoft began accepting bitcoin payments, according to Cointelegraph. In 2015, bitcoin was a cover story in L & # 39; economist. During this period, other cryptocurrencies began to emerge – also based on the blockchain – the most important of which was Ethereum, launched in 2014, with an initial offer of coins (ICO) which raised $ 18 million.

Ethereum was the beginning of another major change in the community: the change in focus from the bitcoin itself to the blockchain as a technology. Using the blockchain, Ethereum allows users to write applications and make money with their work. The most well-known application is the "smart contract". (Although this technology self-imposed as a way to replace lawyers, it's incredibly difficult to snatch lawyers from anything once dug in. That said!) Here's a very simplistic approach to establishing a smart contract: let's say you and I have agreed that if I write you a bitcoin story, you will send me $ 10 for my birthday this year. We can do this through a legally applicable contract, which involves lawyers, notaries and so on, or we can do it through Ethereum. In this last case, you deposit $ 10 of smart coins, and when the terms of the contract are met, those coins are issued to me. If you do not respect the terms of our agreement, the coins will be returned.

While Ethereum was the most significant of these companies, many other ICOs were born: NXT Neo, Spectrecoin, Stratis and EOS among them, often linked to specific activities and products. The expanded universe of blockchain technology – a term in which no one absolutely agrees – took shape as governments awakened to these new cryptocurrencies as taxable and potentially adjustable investment vehicles. In 2017, the US Securities and Exchange Commission (money cops) announced that in some circumstances, digital currency funding events would be considered as securities, and proceeded to file a complaint against a series of fraudulent coins for violation of the securities law.

Now, depending on your attitude, this is potentially a way of legitimizing cryptocurrency ("it is so real that the government is choosing to regulate it as an investment vehicle!") Or a betrayal of the initial promise without government over which entity Nakamoto launched bitcoin. Increasingly, however, the bitcoin has left its original community of true believers.

During 2017, the price of bitcoin has risen above 1,000%, which could explain why it was the center of such intense interest from people who, as you know, earn professionally. (Later, a professor of finance at the University of Texas suggested that half of this growth was due to market manipulation). On December 17, 2017, the bitcoin reached its all-time high of $ 20,000. Cryptocurrency crime also grew – although, in August 2018, a DEA agent said Bloomberg that most of the bitcoin transactions were from the speculators, rather than the black market types that dominated the bitcoins during the Silk Road days.

2018 was harder for those speculators, as the bitcoin fell 80% from its previous year's high. And while its price declined, the interest of most people fell, but not that of finance professionals who can earn when assets increase or decrease in value.

At the time of writing, cryptocurrencies in general – and in particular bitcoins – were being traded by venture capital companies (with Booster as Draper Fisher by Jurveston's Draper and Andreessen Horowitz's Marc Andreessen), hedge funds, mysterious bitcoin "whales" and traditional investors like George Soros. Goldman Sachs, in particular, would have considered the idea of ​​entering the space. Exchange-traded funds (ETFs) allow investors to trade cryptocurrencies such as shares and link digital currencies closer and closer to the system that they were originally intended to replace.

Outside of the financial community, the unexpected popularity of bitcoin has come at a cost. So many people are extracting bitcoins that the powerful chips used by scientists have doubled in price, making it more difficult for astronomers, among others, to do their job. Bitcoin extraction consumes a lot of energy and produces many emissions, which makes the climate hawks nervous.

No one has found out who he was or is Satoshi Nakamoto, even though many have tried. There were several suitors to the crown, but no one has ever provided the definitive proof: to exchange Nakamoto's bitcoins. The crisis of confidence in the banking system seems to have passed. But the biggest winners of the new bitcoin era could well be the people the system was designed to bypass: institutional investors and banks.