The Evolution Of Bitcoin
As you saw earlier, Bitcoin has come a long way here since 2009. Let us discuss here the evolution of Bitcoin till now.
The Rise 2009-16
In the early days, Nakamoto is estimated to have mined 1 million bitcoins, before disappearing and handing over the reins to developer Gavin Andresen who then became the bitcoin lead developer at the Bitcoin Foundation.
At that time, it was still possible to mine bitcoins using the CPU of any basic computer, and between 2009-10 many early bitcoin adopters were able to amass a lot of bitcoins this way. Then GPUs (Graphic Processing Units) became the new standard for mining and thus began the acceleration of the bitcoin mining race. GPUs are specialised processors that were originally designed to accelerate graphics rendering. Their advantage is that they can process many pieces of data simultaneously. Around 2011, some miners started switching from GPUs to FPGAs (Field Programmable Gate Arrays), after the first implementation of Bitcoin mining came out in Verilog (a hardware design language that’s used to program FPGAs). FPGA is an integrated circuit that can be programmed by a user for a specific use after it has been manufactured. FPGA mining was a rather short‐lived phenomenon, and whereas GPU mining dominated for about a year or so, the days of FPGA mining were far more limited—lasting only a few months before custom ASICs (Application Specific Integrated Circuits) arrived. Now bitcoin mining is heavily centralised and monopolised by large mining facilities around the world, especially in China. Each new block earns its miner a reward, which started off at 50 bitcoins in 2009 and was programmed to halve every four years, and is currently at 12.5 bitcoins, or around US$ 80,000. These block rewards are the only source of new bitcoins in the system.
The first bitcoin transactions were between individuals on the bitcoin forum, and someone paid 10,000 BTC to indirectly purchase two pizzas delivered by Papa John’s Pizza. It was a matter of time before the idea to establish a market platform for trading bitcoins like any other currency would arise, giving rise to bitcoin exchanges — the first cryptocurrency exchange platforms. One of the earliest of such platforms was Mt. Gox which was established in 2010. A major contributing factor to bitcoin popularity around this time were activities of the “dark web”(parts of the internet that are encrypted and not typically indexed by search engines)— services like Silk Road, AlphaBay, and Hansa — all marketplaces for illicit and illegal items. Bitcoin was a popular currency on these platforms due to its anonymous nature.
In the spring of 2011, the price of bitcoin was pegged around $2 when some people began investing heavily in it. WikiLeaks and other organisations began to accept bitcoins for donations in June that year, while in September, Vitalik Buterin co-founded the Bitcoin Magazine. Things picked up momentum in 2012 as BitPay reported having over 1,000 merchants accepting bitcoin under its payment processing service, and WordPress too started accepting bitcoins.
February of 2013 saw bitcoin-based payment processor Coinbase report a sale of over US$1 million worth of bitcoins in a single month at over $22 per bitcoin. The Winklevoss twins Cameron and Tyler, who famously sued Mark Zuckerberg and Facebook, bought $11 million worth of bitcoin. By then the price of bitcoin was $110. More people were putting six-figure and seven-figure sums into the bitcoin market and driving up the prices. Two companies, Robocoin and Bitcoiniacs, launched the world’s first bitcoin ATM on October 29, 2013, in Vancouver, BC, Canada, allowing clients to sell or purchase bitcoin currency at a downtown coffee shop.
Chinese internet giant Baidu allowed clients to pay with bitcoins. The Internet Archive announced that it was ready to accept donations as bitcoins and that it intended to give employees the option to receive portions of their salaries in bitcoins as well. In November, the University of Nicosia announced that it would be accepting bitcoin as payment for tuition fees, with the university’s chief financial officer calling it the “gold of tomorrow”. Around that time, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume. But on December 5, the People’s Bank of China prohibited Chinese financial institutions from using bitcoins, and Baidu no longer accepted bitcoins for its services. Overall, from mid-2013 to mid-2014, China went rapidly from a negligible share of bitcoin trading to virtually the entire market.
Bitcoin’s early history coincided and got forever embroiled with that of the Silk Road — an online black market founded in early 2011 and a part of what came to be known as the “dark web” — dealing in illegal drugs, contraband and merchandise. Bitcoin became the sole mode of purchase on the Silk Road which hit an annual turnover exceeding $15 million, and by the time the FBI cracked down on it in late 2013, huge seizures of bitcoins were made from its accounts. It cemented the “bitcoin is for criminals” image in the minds of many. Even after the dismantling of Silk Road, numerous dark market copycats sprang up using bitcoins as their mode of payment.
In Sep 2014, TeraExchange, LLC, received approval from the U.S. Commodity Futures Trading Commission “CFTC” to begin listing an over-the-counter swap product based on the price of a bitcoin, marking the first time a U.S. regulatory agency approved a bitcoin financial product. In December, Microsoft began to accept bitcoin to buy Xbox games and Windows software. In January 2015, Coinbase raised US$ 75 million as part of a Series C funding (one of the stages in the venture capital raising process, typically the third or fourth round of investment), the highest ever for a bitcoin company. Barclays announced that they would become the first UK high street bank to start accepting bitcoin.
The period from 2014-16 remained one of Chinese hegemony over bitcoin in spite of their government’s clampdown banning their banks from engaging in bitcoin transactions. This could be attributed to the Chinese dominance of bitcoin mining wherein miners would have to sell their newly-minted bitcoins.
By spring 2016, a huge chunk of the bitcoin market shifted to Japan when its government recognized virtual currencies like bitcoin officially in March that year. The Japanese Yen became bitcoin’s biggest trading partner, a lead it still maintains. Uber announced the use of bitcoin in Argentina. By September, there were over 771 bitcoin ATMs worldwide. Swiss Railways (SBB) upgraded their ATMs to be bitcoin compatible.
The Boom 2017-18
On August 1, 2017 bitcoin hard-forked into two derivative digital currencies, the bitcoin (BTC) blockchain with a 1 MB blocksize limit and the Bitcoin Cash (BCH) blockchain with a 8 MB blocksize limit. The size of a block equals the amount of data it stores and the largest amount of data that it can store is the blocksize limit.
Around May 2017, the price of bitcoin (BTC) crossed US$ 2000 for the very first time, rising to US$ 3000 just weeks later. By September, it had scaled past US$ 5000 culminating in an all-time high price of US$ 19783.21 in December 2017, followed by a 30% drop within days. The volatility was, and is, palpable. For most of 2018, its value has ranged between US$ 6000 to about US$ 8000.
Analysts have attributed many overlapping causes for this boom—from outright speculative mania, to a general mistrust in governments across the world, to anti-institutional investors and to hedgers trying to protect themselves against a repeat of the Global Financial Crisis of 2008. The political environment of the US in particular, under President Trump, has also been cited as a major cause, as is the thesis that the generational shift has played a huge role with Millennials showing higher interest in bitcoins rather than in owning stocks. While there are any number of naysayers pronouncing that the bitcoin bubble is ready to burst, there are as many who believe that the boom has a long way to go, and that this is just the beginning. In fact, there is even a special term for bitcoin hoarding by believers and fanatics—HODL—or hold on for dear life.
In hindsight, no one could have imagined that people all over the world would give away real money for a digital currency whose network nobody owns, no central bank guarantees it, is not backed by gold or any other asset, is not even accepted for most real-world products and services, is actively discouraged by many governments and is lost forever if an account key is lost. There is nothing comparable to the bitcoin in terms of a global currency, and if one considers other similar efforts to have a broad-based multi-national currency such as the Euro in the European Union, it is immediately apparent that such projects take decades of effort, negotiations and cajoling to make them acceptable, and then forever remain at the risk of unravelling, as evidenced by Brexit. In contrast, an unknown Satoshi Nakamoto brought users from all over the world together to trust a non-state / non-gold backed digital currency within just a few years of its inception.
Even as bitcoin flourished—it remains the star cryptocurrency even today—a 17-year-old caused a stir with his blockchain design and its token which he named the Breath of the Gods, or Ether. His design was preceded by the work of yet another man who virtually invented the concept of the Initial Coin Offering (ICO) — a precursor to the frenzy that was in the making. While the following chapter is their story, the ICO boom made bitcoin the default gateway currency to invest in these tokens thus cementing it as their leader.