Bitcoin

Through several cycles of boom and bust, the world’s most popular and most successful crypto currency has proved its worth and resilience over the years. Detractors who have predicted its demise since essentially the moment it was launched, have been proven wrong time and again, as bitcoin has now entered uncharted territory. Never before in history has a crypto currency made it this far down the path towards universal acceptance and legitimacy, and while it will indeed have to overcome several hurdles in this regard, for the time being it appears to be headed in the right direction.

Bitcoin’s history and story is definitely one of unbridled success from the perspective of speculators.

The beginnings

While the idea of bitcoin first emerged in November 2008 -when a person identified only by the now famous moniker Satoshi Nakamoto – published a paper called Bitcoin: a Peer-to-peer Electronic Cash System – it incorporated several concepts and algorithms invented before, like Hal Finney’s reusable proof of work algorithm and Nick Szabo’s chained asset-registry solution for the storing of proof-of-work data.

Bitcoin: a Peer-to-peer Electronic Cash System by Satoshi Nakamoto

Up until April 2010, bitcoin didn’t actually have any official value. It was mostly traded between cryptography enthusiasts in a rather arbitrary manner. At one point, someone tried to auction off 10,000 BTCs for the price of $50, but no buyer was found.

The first actual bitcoin transaction was initiated by Laszlo Hanyecz, who purchased two pizzas for BTC 10,000 in Jacksonville Florida, by placing a long-distance phone call. At that point, the value of Bitcoin was less than $0.01 per USD.

Early bitcoin mining

It was during these early times that enthusiasts such as Daniel Mross, brother of bitcoin documentary-maker Nicholas Mross (Known for his The Rise and Rise of Bitcoin) got heavily involved with bitcoin mining, thus setting up the beginnings of the infrastructure that would propel bitcoin to heights no one could’ve anticipated at that point in time. Even though at that point, one could use a simple desktop PC to mine bitcoins profitably, Mross and those like him already began purchasing dedicated hardware from operators such as Butterfly Labs. Butterfly Labs later went under, leaving many of their customers high and dry, awaiting their dedicated mining units.

Nakamoto disappears, Andresen takes over

As bitcoin slowly but surely took off, besides miners like Mross, programmers began jumping on board too, especially after the need for continuous development and maintenance became painfully obvious in the wake of an August 2010 security breach.

Satoshi was still the man (or rather: entity, as some have speculated that a whole team of programmers may have been hiding behind the moniker) at the helm of bitcoin development when Gavin Andresen joined the fold. According to Andresen, even back then, Satoshi seemed uncomfortable being seen as the father of bitcoin, as he was convinced that enablers and supporters of the currency were essentially “kicking a hornets’ nest”. An interview that Andresen eventually did with the CIA was apparently the last straw for the secretive developer. Satoshi disappeared, though he’s been known to post very sparingly since.

Bitcoin takes off

The first bump in the price of bitcoin came in July 2010. Parity with the USD was reached in February-April 2011. Having cleared that psychological hurdle, the crypto currency drew more attention, and as more and more people got invested in it – emotionally as well as financially – its value began to skyrocket. By July 2011, it had reached the $31 mark. This is when the first bubble popped. By December 2011, the value of the currency was scraping the bottom of the barrel at $2. In 2011, organizations such as Wikileaks and the Electronic Frontier Foundation began accepting and supporting bitcoin. This resulted in more upward pressure in the BTC/USD pair, and by December 2012, the price had bounced back to $13. As more and more websites and innovation-oriented online operations began supporting the currency, exchanges started popping up, as well as operations meant to facilitate the in- and outflow of money from the bitcoin ecosystem.

The first bitcoin millionaires

Charlie Shrem’s BitInstant was one of the first such operators. The need for the services offered by BitInstant was certainly there, and the self-described “psychologically unemployable” entrepreneur pounced on the opportunity, becoming one of the first bitcoin millionaires and effectively lending his face to the bitcoin “brand”. BitInstant rode the next bitcoin bubble to the top, drawing high-profile investors like the Winklevoss twins, who poured some $1.5 million into BitInstant.

By this time, bitcoin was riding new highs, culminating at $1,242 on 29 November, 2013. Following a massive security breach at Mt. Gox – at the time the top bitcoin exchange – the currency lost over half its value, as Mt. Gox was forced to shut down. When the exchange reopened, the price of bitcoin fell further. While severe indeed, this bust turned out to be but another temporary snag in the path of bitcoin. It didn’t spell the end of BitInstant either. That happened later, when it came to light that Shrem had been providing bitcoins to a reseller, who operated on Silkroad. Convicted of money laundering, Shrem was placed under house arrest.

While the actual impact companies like Shrem’s BitInstant had on the evolution of bitcoin was probably negligible in the grand scheme of things, taking a closer look at the history of the currency from the unique perspective of these companies is an interesting and insightful exercise to say the least.

Jered Kenna’s TradeHill was another bitcoin-focused startup that made waves in the Mt. Gox era, becoming the first US-based bitcoin exchange that would at least rival Mt. Gox. Rebounding off a previously failed similar attempt, Kenna teamed up with Ryan Singer in TradeHill, and the two entertained lofty plans for a while. They wanted to implement auto trading – a rather dubious and at the same time ambitious – undertaking, but things eventually fell apart for the operation, as regulators cracked down, and stifled innovation – according to Kenna. Besides foreshadowing the regulatory problems that bitcoin would encounter, the TradeHill fiasco drew attention to the frail nature of the value of the crypto currency. According to Ryan Singer, if people believed bitcoin had value, it would indeed have value. Having recently launched a bitcoin black pool, Kenna has remained an actor on the Bitcoin scene to this day.

Physical bitcoins

Putting an actual face on bitcoin had been attempted several times, but it wasn’t until Mike Caldwell’s casascius coins that this venture was met with success. Caldwell created physical bitcoins that actually carried the value of digital bitcoins, thus finally giving the average people a visual anchor to conjure when thinking about the currency. According to Caldwell, the rise of bitcoin didn’t toll the bell of doom over the banking industry. Rather, it would do to banking what email did to the postal service: force it to play to its strengths rather than its weaknesses.

Still, even with various governmental and regulatory agencies granting bitcoin the nod – or at least the benefit of doubt for the time being – legal problems persisted for the currency. Japanese regulators went after Mt. Gox, and in February 2014, the exchange folded for good. That prompted a temporary dip in the value of the currency, but it ended up shrugging it off with relative ease.

Bitcoin and crime

In the US, Silkroad caught the attention of authorities. A virtual black market based on bitcoin, Silkroad facilitated illicit activities such as drug dealing and arms traffic over the internet. While the operation was shut down, it drew a great deal of attention to the impact of bitcoin on the proliferation of criminal activity – which became yet another Achilles’ heel in the already shoddy legal image of the currency.

Despite all these trials, tribulations and dead-ends, authorities never committed to shutting down bitcoin. FinCEN has even begun pondering ways to regulate the currency.

Startups continued to pop up as the value of bitcoin seemed headed to more stable pastures. Brian Armstrong and Fred Ehrsam’s CoinBase managed to raise $5 million in investments. The San Francisco-based bitcoin wallet is still one of the most trusted operators of the scene.

Mt. Gox and other bitcoin pioneers

Unlike some of the above-mentioned companies, Mt. Gox was a major milestone in the history of bitcoin. Now defunct, the company handled some $6 million in daily trades, and had 18 employees at its peak. Run by Gonzague Gay-Bouchery and Mark Karpeles, Mt. Gox was originally an exchange serving Magic The Gathering players. Mt. Gox stands for Magic The Gathering Online Exchange. Mt. Gox was the first exchange which made the acquisition of bitcoins possible for all those interested, therefore it was a true bitcoin trailblazer.

Another entity/person who had a major positive impact on the rise of the world’s top crypto currency, was Bitcoin Magazine and its editor, Vitalik Buterin. Founded back in 2011, the publication has accompanied bitcoin for most of its existence.

Besides such non-profit-oriented efforts, the bitcoin scene yielded a variety of other initiatives too, like Erik Voorhees’ Satoshi Dice, which became the first app to subject bitcoin’s capabilities to a proper stress test. At the peak of its run, Satoshi Dice handled more bitcoin transactions than any other single app out there. Voorhees later moved his operation to Panama, to dodge US regulation, and he ended up selling Satoshi Dice. In its wake, he launched Coinapult.

Bitcoin and regulation

Lack of regulation and a pronounced grey area in laws has always dragged bitcoin down, and unfortunately, that is likely to be the case for some time. Proper financial regulation takes years to develop and even longer to implement. The banking sector doesn’t really know what to make of bitcoin regulation-wise because there are no precedents and laws governing its adoption and use.

Following a number of subpoenas issued by New York’s Department of Financial Services, most of the above mentioned companies were closed. bitcoin mining has taken a hit too. Nowadays, simply running scores of dedicated ASICs no longer makes mining profitable. The extremely low cost of electricity in China and the natural suitability of locations like Iceland (where the year-round cold does away with issues related to cooling) have cornered the bitcoin mining market. Miners like Daniel Mross were forced to sell their hardware to cut their losses and to wrap up their operations. Some hardware makers have folded too.

The issue of lack of trust still plagues the bitcoin project. Specialists – such as Georgetown University’s James Angel – still consider bitcoin little more than  a passing fad. Obviously, bitcoin’s case isn’t helped by the fact that thus far, some 45% of all bitcoin exchanges ever launched have shut down. Its original creator still unknown though, the crypto currency has been able to shake off an impressive amount of setbacks over its relatively brief existence.

Satoshi Nakamoto speculation

At one point, Newsweek’s investigative journalism uncovered a man named Dorian Prentice Satoshi Nakamoto, living in California, who was thought to be the elusive creator of the world’s most successful digital currency. Although the discovery kicked up a massive amount of hype, Dorian Satoshi Nakamoto denied any involvement with bitcoin, explaining away his previously misleading comments about the issue as a misunderstanding, related to his previous work for military contractors, some which was classified.

The actual Satoshi Nakamoto chimed in on the issue as well, stating in a post that he was not Dorian Satoshi Nakamoto.

Far above and beyond the name-coincidence though, Dorian’s profile fit perfectly into the shoes of the as yet anonymous creator of the currency. He was a physicist, a systems engineer and he had worked on classified government projects before becoming a libertarian. He also lived close to cryptographic pioneer Hal Finney, mentioned at the beginning of this article. Still, the actual identity of Satoshi Nakamoto has never been confirmed.

Bitcoin’s legal status

The bottom line about bitcoin is that its legitimacy and ultimately its value, is solely dependent on its legal status at this point. Its finite nature guarantees that its value will continue to rise as more and more of it is mined. All that can be wiped away by a regulatory agency though, through a simple decision.

For now, bitcoin has been classified as a “virtual currency”, which is not legal tender under any jurisdiction. According to FinCEN, bitcoin owners are absolved from all legal obligations associated with ownership of legal tender. None of the registration, record-keeping and reporting regulations apply to bitcoin. Those involved in the generating of bitcoin though have been designated “money transmitters” and they have to register as such if they operate out of the US and they sell the virtual currency for national currency.

This state of affairs is a sort of compromise-situation in which bitcoin has thus far thrived value-wise. Now flirting with the $1.2k mark, it is bound to head much higher if nothing significant changes in regards to its legal status.

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