The Bitcoin phenomenon has been making headlines lately, mostly due to incredible price increases and fluctuations. I personally came to know the virtual currency way back in 2011, and Bitcoin’s evolution since then has only really shown me one thing: it’s an enigma which nobody can predict.
It starts with the creator of Bitcoin, a shady figure who called himself Satoshi Nakamoto. The name is most likely a pseudonym, but again, nobody really knows. Over the years many people have been «outed» as being behind the Satoshi Nakamoto name, but none of these claims have ever been conclusively proven. There may even have been more than one person acting as Nakamoto, as there were marked differences in writing style in some of his posts. Whoever it is or was, seems to have no interest in involving himself with Bitcoin anymore, to the point that the creator’s own personal Bitcoin wallet which contains hundreds of millions of dollars worth of Bitcoin, has not been touched since the very beginning. It seems likely that, even if this person is still alive, access to those coins has probably been lost. Less than two years after launching Bitcoin, Satoshi Nakamoto turned over control to his closest partner on the project, and disappeared.
I essence, Bitcoin is a piece of software. A computer program which keeps a very long list of all transactions that have ever happened. This list is called the blockchain. Each block can be thought of as a page, which contains transactions between Bitcoin addresses. The Bitcoin software is written in such a way that, on average, a new block is created every 10 minutes. Responsible for creating these blocks are the «miners» — computers which are running the Bitcoin mining software. Mining is really number crunching, as the blocks use heavy cryptography to secure the transactions. Without going into the technicalities of the exact cryptography used by Bitcoin, it is considered to be unbreakable with contemporary computers or those of the foreseeable future. When a miner «discovers» a new block, this basically means his mining software hit a lucky number, he is awarded Bitcoins for his trouble. But there is no central system behind Bitcoin which is controlled by a single entity. It is the people who are mining, those who are running the Bitcoin software, who control the security and, indirectly, the development path of the currency. The majority rules. If tomorrow the majority decides to run a software version which alters the properties of Bitcoin, they could do so and Bitcoin would be changed. The currency depends on a wide distribution of miners and their own interests to stay on the right path, whatever it may be.
The first Bitcoin client version 0.1
Obviously, at the very beginning, Bitcoins were very easy to obtain as only very few people were trying to mine them. Because Bitcoin is programmed to release a new block every 10 minutes, the fewer people there are running the software the more Bitcoins each of them will get. The reward per block is also deflationary, it started at 50 bitcoins if you found a block when the currency was launched but the reward gets cut in half after every 210,000 blocks. We are currently at a block reward of only 12.5 bitcoins. Nearly 80% of all Bitcoins that will ever exist have already been mined because total supply is limited to 21 million coins. In the early days of Bitcoin, while it was still virtually unknown, a few handfuls of individuals amassed many thousands of Bitcoins each. But as you couldn’t actually use them for anything, they were generally considered worthless. This resulted in many Bitcoins being deleted or lost due to people simply not caring about them. This means that the actual amount of Bitcoins that can be accessed and used is a lot smaller than 21 million still. In theory, this should mean the price will keep increasing in the future if the currency becomes more and more popular. When that happens, it is assumed that transaction fees rather than block rewards will give incentive to miners to keep the machines running. Because Bitcoin cannot function without miners to process and verify transactions.
The very first purchase using Bitcoin, as far as one can tell, came in 2010 when someone agreed to buy two Pizzas for the price of ten thousand Bitcoins in total. While a great proof of concept for the purchase power of Bitcoin, it wasn’t the best ever investment as those coins would now be worth a cool twenty five million dollars. I hope those Pizzas tasted good, at least. A few months after this now infamous Pizza Purchase, the first Bitcoin exchange was launched. Called Mt.Gox, it allowed people to buy Bitcoins for money. For pennies at first, by the time I mined my first Bitcoin on my home computer in late 2011, each coin was worth 7 or 8 dollars each. I would assume that at this point Mr. Pizza was already kicking himself, but the fact that you could now sell Bitcoins for actual money meant that a lot more people were mining and profits were pretty low. But the mere fact that your computer was creating something of monetary value using nothing but electricity was an extraordinary thing and who would say no to a bit of free money, anyway.
These two Pizzas were purchased in 2010 for 10000 Bitcoin, which would now be worth 25 million US dollars
The fact that Bitcoins now had an unregulated exchange on which they could be bought lead to the first Bitcoin price bubble where the price reached about 30 dollars before crashing back down. Unregulated exchanges are basically the Wild West, where people with large amounts of money and Bitcoins manipulate the price. There was no government oversight at all, no laws that would apply existed, and left to its own devices it seems that human nature will often tend to screw over anonymous others for personal gain. Between the pump-and-dump schemes and never ending Bitcoin thefts by hacking or scamming, Bitcoin’s reputation wasn’t stellar. It didn’t help either that it was the currency of choice for buying illegal substances on underground websites. Paying with Bitcoin could be done anonymously, so it’s not surprising that one of its first uses was paying for stuff that is illegal. But criminals use cash for the same reason, so Bitcoin isn’t exactly the only currency with that problem.
From here, Bitcoin went through cycles of bubbles and crashes. In early 2013, the price reached 266 dollars before crashing back down to less than 50. But in November of the same year, the price would hit a peak of more than 1200 dollars before, again, crashing down. The next three years would see gradual depreciation, with the odd peak and drop, before a gradual recovery and run-up to the recent all-time-high price of just about 3000 dollars. For anyone who is investing in the stock market, the swings must seem absolutely insane. But then there are hundreds of smaller cryptocurrencies which have appeared like mushrooms in recent years, borrowing heavily from Bitcoin’s ideas and code, which make Bitcoin look like a pretty stable investment by comparison. Coins like Ethereum have also seen a meteoric rise during the recent price increases, making people millionaires out of investments of only a few hundred dollars not that long ago. On the other side of the coin, many people lost everything they had invested simply because the exchanges they used were hacked and went out of business, or the owners of the exchange simply took off with the money. Also, given the history of Bitcoin and other cryptocurrencies, any large rise often leads to a crash not long afterwards.
Because Bitcoins became as valuable as they did, mining also went from a regular guy’s little hobby to a serious business. Special processors that have only one task, mining Bitcoins, were developed so they could mine much faster than any regular PC hardware could. The first people to receive these new devices made an absolute fortune, particularly because their introduction coincided with the late-2013 price bubble to over a thousand dollars per coin. But because the difficulty of Bitcoin mining adjusts automatically to maintain the 10-minute block time, it soon became an arms race. Ever faster processors using ever less electricity, because the price of electricity turned out to be the limiting factor. Insanely large mining farms, with thousands of specially constructed miners inside, started taking over the global production of Bitcoin. Because the price of electricity became so critical to turning a profit, most of them ended up being located where power is cheapest. Basically, China.
A typical large-scale Bitcoin mine
To give you an idea of how the difficulty of mining Bitcoin has progressed over time, it was 1.00 in 2009. About 10,000 in 2010, 1 million in 2011 and 10 million in May of 2013. 6 months later however, at the end of 2013, difficulty hit 1 billion. That was the effect of dedicated computer chips for mining hitting the market. Right now, the difficulty is over 700 billion. To mine even 1 bitcoin with a regular computer like the one I used back in 2011 would now take about 15 thousand years on average.
It seems unlikely that Satoshi Nakamoto could have foreseen all the drama and excitement that Bitcoin has caused, or that Bitcoin would go from completely decentralized to controlled by a few gigantic mining companies. It’s also unlikely that he developed Bitcoin to become a kind of digital gold, a speculative store of value or commodity instead of something that you use as currency on a daily basis, but this is what has happened anyway. The entire story of Bitcoin is a tale of things that once seemed impossible, or highly improbable, but still happened. It’s also a story of dreamers, the wildest optimists, being right for once. I certainly never thought that a Bitcoin could be worth as much as three thousand dollars when I first got into it. If I had, I wouldn’t be typing this article. I’d be more likely to be fishing somewhere off my own private island in a warm ocean somewhere.
Very few people had the foresight, or stubbornness, to get rich from Bitcoin. Most of us, when we see a 30 or 40 percent gain, go ahead and sell. It just doesn’t seem realistic to wait for that 5000 percent gain. But that’s exactly what you had to do if you wanted to get rich. It was never a sure thing, rather a very risky investment that could either go very well or end in tears. I’m happy to say that I have never directly bought Bitcoins or spent any money on them. I managed to mine a handful of them when it was easy, and traded them to make enough money to perhaps buy a somewhat nice car with. Essentially, most of us are left with the feeling of missed opportunity and what could have been if only we didn’t sell. That we made a decent amount of money out of thin air doesn’t soothe the pain of lost riches much.
At this point, I wouldn’t recommend anyone to actually buy cryptocurrency speculatively, as it’s just not a prudent investment. It’s about as good an investment as lottery tickets are, I suppose, and the same rule applies: don’t put in any money that you can’t afford to lose. Nobody knows whether Bitcoins will some day be worth ten thousand, a hundred, or even a million dollars each. They could just as well end up close to zero dollars. Using it as a method of payment for day-to-day things strikes me as inconvenient because the exchange rate is so volatile and it doesn’t make life easier compared to a good old bank card. Except that you don’t need to sign up with a bank, obviously. For sending money across borders quickly however, and to be completely certain that the sender cannot reverse the transaction or reclaim the money, Bitcoin is already genuinely useful.
But meanwhile, there is disagreement between the people who maintain the Bitcoin code, the mining companies, and the small users over how to expand the capacity of Bitcoin to include more transactions. It could end up in all out war, and Bitcoin splitting into several different coins with much lower value. A different coin, like Ethereum, could overtake Bitcoin to become the number one virtual currency. Governments around the world aren’t sure of how to deal with Bitcoin, with some of them choosing to ban Bitcoin while others try to regulate and support it. Nobody knows. The only thing that seems certain is that Bitcoin will continue on its path of sheer unpredictability. It’s still a very long way off from becoming boring.