The origin and development of Bitcoin
A look at Bitcoin's beginnings and price history.
The coronavirus pandemic has been a boon for Bitcoin.
From humble beginnings in 2008 to its 2017 price peak, Bitcoin has taken investors and the world for quite the ride. In just over a decade, it's spiked and crashed and rallied and fallen again.
"Bitcoin is following principles of economics and principles of market efficiency," says Hemang Subramanian, assistant professor in Florida International University's business information systems department. "It is an asset that is not controlled by a central entity, that is secure, international and fungible, liquid and is available in a limited supply for trade. This demand at near-constant supply has caused prices to go up disproportionately in a short period of time, attracting more investors."
Some would say Bitcoin's raucous journey has paved the way for the thousands of other cryptocurrencies used for financial and investing activities today, he says. Here's how Bitcoin did it.
When Did Bitcoin Start?
"The idea behind Bitcoin was introduced to the world on Oct. 31, 2008, at the depth of the financial crisis by a pseudonymous person called Satoshi Nakamoto," says Chetan Chawla, assistant professor of entrepreneurship at North Central College in Naperville, Illinois, who studies cryptocurrencies and blockchain.
Nakamoto posted a message on a cryptography mailing list titled, "Bitcoin P2P e-cash paper." In it was a link to a white paper called "Bitcoin: A Peer-to-Peer Electronic Cash System." Both of these are still available online.
In these papers, Nakamoto laid out the concept for Bitcoin as a decentralized, digital currency. Being decentralized means there is no single administrator but rather a public ledger of transactions that anyone can store on their computer, says Kris Marszalek, CEO of Crypto.com. "Coins can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries."
On Jan. 3, 2009, the blockchain was launched when the first block, called the genesis block, was mined. The first test transaction took place about one week later.
"For the first few months of its existence, it was obtainable only by miners validating the Bitcoin blockchain," Chawla says.
At this point, Bitcoin had no real monetary value, says Mark Grabowski, an associate professor at Adelphi University who teaches a course on Bitcoin and author of "Cryptocurrencies: A Primer on Digital Money." Miners – computers that solve complex math problems to uncover new bitcoins and verify previous bitcoin transactions are legitimate and accurate – would trade Bitcoin back and forth just for fun.
It would take more than a year for the first economic transaction to take place, when a Florida man negotiated to have two Papa John's pizzas, valued at $25, delivered for 10,000 bitcoins on May 22, 2010. "That transaction essentially established the initial real-world price or value of bitcoin at 4 bitcoins per penny," Grabowski says.
Fast forward to today, and that same transaction "would have a value of $114 million," says Peter C. Earle, economist and research fellow at the American Institute for Economic Research. In honor of this pivotal moment, cryptocurrency fans and supporters call May 22 Pizza Day.
"In the early days, the first transactions with Bitcoin were 'negotiated' on internet forums with people bartering for goods and services in exchange for bitcoin," says Garrette Furo, partner at Wilshire Phoenix, a New York-based investment management firm. "The value of bitcoin was originally arbitrary."
Then, in 2011, miners and coders started to build other networks like Ethereum and Litecoin and began to improve the code behind Bitcoin's blockchain, adapting it for different uses, Furo says.
"This wider base of applications brought in more individuals, which contributed partly to the increase in Bitcoin's perceived value," he says. "There was also an increase in the use of Bitcoin as currency once select businesses began to accept the asset alongside traditional currency."
Once Bitcoin became available on exchanges in 2010, it became easier to buy, sell, trade and store. Thanks to these exchanges, bitcoin could also be priced against the U.S. dollar, Chawla says. "From a low of a few cents in 2010 to the all-time high of late 2017 when each bitcoin touched U.S. $20,000, Bitcoin has come a long way and continues to dominate the cryptocurrency markets."
Bitcoin Price History
"Bitcoin's history is largely one of astronomical growth punctuated by a few severe price retrenchments," Earle says.
In February 2011, bitcoin's price crossed the $1 threshold. "For its first few years as it grew, its price was under $2," Marszalek says. "In June 2011, it hit its first bubble, rocketing to around $31 before sinking back down to the single-digit range."
Almost two years later, in April 2013, Bitcoin reached $200. By the end of November that same year, it was worth more than $1,000. It then rose tenfold to $10,000 in November 2017.
Bitcoin's highest price was about $19,650 in mid-December 2017, Earle says, noting there were different peak prices on different exchanges. "It then fell tremendously over the next few years."
The 2017-2018 bubble was primarily led by a boom in initial coin offerings, or ICOs, Furo says. Some market veterans compare the Bitcoin bubble to the internet boom at the end of the 20th century.
"Everyone from your next-door neighbor to the wealthiest hedge fund managers was talking about Bitcoin or some altcoin, new network or protocol," Furo says. "The ICO craze brought in billions of dollars into the crypto space. Investors saw the value of coins fall dramatically in the early months of 2018 as prices crashed amid uncertainty, fraud and a lack of belief among other psychological and technical factors."
After the fall of bitcoin's value, what you could call a "more mature market" arose around the cryptocurrency. "Fidelity entered the custodian space (and) national banks were given permission to custody digital assets," Furo says. Today, Square offers Bitcoin trading in all 50 states.
"Because of these developments, the market for Bitcoin has become relatively mature," he says. "Smart and efficient exchanges exist, and core institutional-grade players are adopting the necessary measures to create a sustainable and viable market for the trading and investing of Bitcoin and other cryptocurrencies."
The 2020 global pandemic has also been a boon for the digital currency, reflected by its current price of more than $10,000, Marszalek says.
Today, one bitcoin is worth a little less than $12,000. It's a far cry better than its post-peak lowest price of just more than $3,000.
"To this day, no one knows who Satoshi Nakamoto is or was," Earle says. "It's a subject not only for debate, but speculation and – perhaps inevitably – conspiracy theories."
These theories abound, from Bitcoin actually being a skunk work, or advanced and often secret project of Google or an intelligence agency like the National Security Agency, Earle says. "Others believe that it's a 'trapdoor project' which, when it gets big enough, a malevolent party which has been lying patiently in wait for over a decade will suddenly seize control of."
To Earle, more important than Bitcoin's price history is its "testimony to two long-disputed views: First, that money is a good like any other, (and) second, that money can come about as a result of a market process."
While BItcoin is still growing into its role as a store of value and unit of account, cryptocurrencies, and especially Bitcoin, have largely buried the "idea that money somehow isn't money unless it is accepted as payment for taxes," Earle says. (The IRS does not accept bitcoins.)
So what is in store for Bitcoin's future? No one can tell for certain, but Furo sees it being a bright and exciting place. "Investment vehicles that are innovative, cost-effective and transparent are nearing reality and will help make investing in cryptocurrency even more accessible," he says. "This access would rival that of traditional markets."
Just bear in mind that no investments – particularly frontier investments – are without risk. If there is one lesson to be taken from Bitcoin's history, it is that what goes up can also come down, and it can come down fast.
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