Starting off as a geeky thing that no one paid attention to, Bitcoin has since blossomed into the mainstream and has reached a valuation as high as $69,000 per coin (at the time of writing). As impressive as this feat is, the majority of people still do not understand where Bitcoin came from, why it is important, or how it even works at the most basic level. This fundamental understanding of Bitcoin will pave the way for understanding the rest of the digital assets that currently exist.
“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party” (Nakamoto, 2008). This legendary quote was posted on October 31, 2008 to an internet forum for cryptography by Satoshi Nakamoto – the pseudonymous creator of Bitcoin. In the post was also a link to the original bitcoin documentation (aka whitepaper) that outlined a need for a peer-to-peer version of electronic cash and how such a project could come to fruition.
Coming off the heels of the Financial Crisis of 2007-2009, Bitcoin’s mission was to take the role of money out of the hands of centrally controlled financial institutions and return that power to the people. This becomes more apparent when you take a look at the metadata of the first ever Bitcoin transaction and see, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” (Bitcoin / block / 0). The uncanny timing of bringing the Bitcoin network online during this tumultuous period has led to many conspiracy theories about the true identity of Satoshi. Some such theories suggest that Satoshi was a government creation. Regardless, the tangible impact that Bitcoin will have on economics, and society as a whole, has yet to be seen.
What does removing money from the control of centralized entities look like in practice? Currently banks can freeze transactions, limit account activity, and even close accounts without notice. As history has shown, banks can even go out of business and lose customer funds outright. Furthermore, federal governments around the world have the power to sanction countries and cut off economic ties for any reason the governments deem appropriate.
With a peer-to-peer system, it is virtually impossible to stop someone from transacting with another, anywhere in the world, and whenever they may want to conduct business. Another advantage is the ability to avoid having your money seized from your own wallet (we will discuss self-custody wallets in the next section). We can begin to imagine why the creator of such a disruptive piece of technology may want to stay hidden from the limelight.
- Cryptography – A study of secure communications techniques in an adversarial environment
- Metadata – Data that describes some other data. Ex. the caption describing an image
- Whitepaper – Information document used to promote or highlight the features of a solution to a problem, product, or service
Bitcoin’s Early Use-Case
The trustless and censorship resistant qualities of the Bitcoin network lead to the explosive growth of large black markets on a hidden version of the internet (aka dark web). These online marketplaces allowed the sale of illicit drugs, guns, and even hitman services among others. At the time, the largest Bitcoin-centric market was the Silk Road. Launched in 2011 by Ross Ulbricht, the Silk Road aimed to be the marketplace to sell virtually anything, anonymously, by using the Tor Browser to access the dark web and only allowing Bitcoin for transactions.
By 2013, the Silk Road website was taken down by the FBI. Ross Ulbricht and other key contributors to the Silk Road ecosystem were identified through online identity leaks. After a four-week jury trial, Ross was convicted of the following seven offenses: distributing narcotics, distributing narcotics by means of the Internet, engaging in a continuing criminal enterprise, conspiring to distribute narcotics, conspiring to commit computer hacking, conspiring to traffic in false identity documents, and conspiring to commit money laundering. In addition to the life sentence prison term, Ulbricht was ordered to forfeit $183,961,921. A major blow to the reputation of Bitcoin, but the underlying technology and its benefits were unfazed.
- Dark Web – Content that is not indexed by traditional search engines and requires special software or authorization to access
Bitcoin Mass Adoption
Fast forward to September 7, 2021, after many political attacks and extremely volatile price movements, Bitcoin was adopted by the country of El Salvador as legal tender. It was the first country in the world to do so. This means that Bitcoin is an accepted form of payment for any debts rendered. For context, the only other currency the country has as legal tender is the US dollar.
The impact that Bitcoin will have on the economy of El Salvador will have to be closely examined over the coming years, but the game theory suggests other countries will want to join in on the action sooner than later. Outside of the censorship resistant properties that we spoke about earlier, Bitcoin has monetary properties that make Bitcoin act as a deflationary instrument over time. This suggests that inflation stricken countries may actually benefit greatly from holding Bitcoin, which would allow the country to preserve purchasing power in the long-run. More about Bitcoin’s deflationary properties will be discussed in the next section.
From a random idea online to a nation’s official currency, Bitcoin has infiltrated the minds of millions around the globe in a relatively short period of time. How we view money and ownership has been attacked at a fundamental level and has since created a multi-trillion dollar industry, with individuals building around the ethos of open systems.
- Bitcoin / block / 0. Blockchair. (n.d.). Retrieved March 21, 2022, from https://blockchair.com/bitcoin/block/0
- Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, Technology, and Governance. Journal of Economic Perspectives.
- Hernandez, J. (2021, September 7). El Salvador just became the first country to accept Bitcoin as legal tender. NPR. Retrieved March 21, 2022, from https://www.npr.org/2021/09/07/1034838909/bitcoin-el-salvador-legal-tender-official-currency-cryptocurrency
- Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin.org.
- Nakamoto, S. (2008, October 31). Bitcoin P2P e-cash paper. Metzdowd. Retrieved March 21, 2022, from https://www.metzdowd.com/pipermail/cryptography/2008-October/014810.html
- Ross Ulbricht, aka Dread Pirate Roberts, sentenced to life in federal prison for creating, operating ‘Silk road’ website. ICE. (2015, May 29). Retrieved March 21, 2022, from https://www.ice.gov/news/releases/ross-ulbricht-aka-dread-pirate-roberts-sentenced-life-federal-prison-creating
- Singh, M. (2022, February 8). The 2007-2008 financial crisis in Review. Investopedia. Retrieved March 21, 2022, from https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp