Hey crypto nation! This is Kris from Exodus and in this video we’ll talk about the coin
that started it all. The king of crypto. The coin that for many people is synonymous to
cryptocurrencies: Bitcoin. Bitcoin. Bitcoin
So, without much ado, let’s dive into our brief history of Bitcoin.
It all started soon after the financial crisis of 2008 when on October 31st the now famous
whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System” was shared on a cryptography
forum by Satoshi Nakamoto, as an answer to the shortcomings of the traditional, fractional
financial system that had led to the crisis
The problem with electronic payments in the past is the risk of the same money being spent
twice, this is called double spending. The issue was the inability to verify whether
a digital currency has been spent more than once. The only solution that existed up to
that point, was to have a “trusted” third-party entity that verified all transactions, like
a central bank. But the experience of 2008 had shown that these “trusted” entities
don’t always work in the best interest of the people whose money they handled.
Satoshi solved the double-spending problem using cryptography, proof-of-work and a decentralized,
peer-to-peer network of nodes that validate transactions and transferred the ownership
of wealth to each person’s hands.
What a brilliant idea!
What Satoshi proposed was that transactions would be added to blocks of data, each with
a timestamp of the time of creation, and each new block would be added after the previous
one and would be cryptographically related to it, so that if one block is changed all
subsequent blocks must be changed too. And thus the block-chain was created.
But in order to create a new block, there needs to be a cost to it, otherwise anyone
could add any number of arbitrary blocks to the chain. That cost is none other than the
electricity needed by computers to solve a mathematical problem. The first one to do
gets to add a new block to the chain. This new block generates new bitcoins, which the
miner that solved the problem gains as a reward for their efforts, along with all the transaction
fees. That is proof-of-work, also known as “mining”, referencing the effort needed
to mine precious metals.
This Proof of Work also secures the network because in order for an attacker to take control
of the network and change previous transactions they would need to control the majority of
the computing power of the network, the infamous 51% attack
As we know, the cost of running a miner today that actually mines bitcoins is extremely
high, making the accumulation of such power by one entity practically impossible. But
even if two or three mining pools joined forces and acquired the necessary 51%, it would still
not make financial sense to attack the network, as they would completely undermine their own
wealth by destroying the credibility of Bitcoin.
All that, and more, were described in the original whitepaper that started the amazing
journey of cryptocurrencies. Few days later, Nakamoto registers the project on SourceForge,
the open-source code platform, and on January the 3rd 2009 the first ever bitcoin block,
named the genesis block, is mined, awarding Satoshi the first 50 bitcoins of the 21 million
that will ever be created.
In that block, Nakamoto puts the message: “The Times 03/Jan/2009 Chancellor on brink
of second bailout for banks.”, a headline of London Times that day, which has been interpreted
as both a timestamp and a critique on the traditional financial system. On January 9,
version 0.1 of Bitcoin is published. It is so complete, that for many it's an indication,
along with the ingenious ideas in the whitepaper, that Satoshi Nakamoto cannot be just one person,
but it’s the pseudonym of a group of people. The identity of Bitcoin’s founder remains
a mystery until today, and although many names have been proposed, there has been no concrete
proof for any of them, while most of the candidates have denied being Satoshi Nakamoto.
Regardless of who Satoshi Nakamoto really is, on January 12, 2009 he makes the first
ever bitcoin transaction, sending 10 BTC to developer Hal Finney, who was actually one
of the candidates to be Satoshi. Fast forward a few months and the first ever BTC/USD rate
is established on October 5, 2009, based on the cost of electricity to produce one bitcoin.
The rate was $1 = 1309.03 BTC, or inversely, 1 BTC was worth just $0.00076, a fraction
of a cent! A few months later, on February 6, 2010, the first ever Bitcoin exchange is
established. It’s funny to look back to these early discussions and the bitcoin price
predictions these very early adopters were making, where $12 dollars per BTC seemed like
something taken out of a fantasy novel. Who could have imagined back then where Bitcoin
would be today.
A couple of months later, in what would turn out to be a historic event, the first purchase
of goods with Bitcoin takes place.
Developer and early adopter, Laszl, offers 10,000 BTC for two large pizzas, in bitcointalk.org.
Someone took him up on that offer and ordered for him the two pizzas. With a cost of around
$25 dollars, these pizzas set the first “real-life” value for BTC at $0.0025 dollars. With today’s
valuation those pizzas are worth over $100 million dollars! Definitely the most expensive
pizzas ever bought. Regardless, the 22nd of May 2010 was a significant milestone in Bitcoin’s
history and has since been celebrated in the ecosystem as “Bitcoin Pizza Day”.
But even 1.5 months later, Laszlo had already overpaid for his pizzas. Version 0.3 of Bitcoin,
that was released on July 7, is mentioned in tech-site slashdot.org and that drives
many users to explore the new technology. As a result, in just five days, Bitcoin price
rises tenfold, from $0.008 on July 12 to $0.08 on July 17.
On December 10, 2010, an article on PCWorld about the Wikileaks scandal and its inability
to get access to financial services, mentions Bitcoin as a funding alternative. The next
day Satoshi Nakamoto posts his final words on bitcointalk.org: “It would have been
nice to get this attention in any other context. WikiLeaks has kicked the hornet's nest, and
the swarm is headed towards us”. For a man who apparently values anonymity and privacy,
having Bitcoin linked with Wikileaks at that time, seems to have raised a red flag that
prompted him to leave the project. As he said in his final email correspondence a few months
later, “[he] moved on to other things”.
On February 9, 2011, Bitcoin reaches parity with the dollar on Mt. Gox, and a couple of
months later, on April 23rd, it surpasses the Euro and the British Pound. And less than
1.5 months later, the first parabolic movement of Bitcoin’s price takes place. On June
2nd, it reaches $10, then by June 8, it climbs to its highest price yet of $31.91, only to
plummet again to $10 four days later, on June 12. This movement would become known as “The
Great Bubble of 2011”, and as we know today, it wouldn’t be the last parabolic movement
Bitcoin ever did.
Although the core idea and functionality of Bitcoin has remained the same since its inception,
it has also received many improvements. In April 2012, one such major improvement goes
live. It’s Pay-to-Script-Hash (P2SH), which gives birth to addresses starting with 3.
These addresses allow the recipient to set any number of arbitrary conditions that need
to be met in order to spend the funds, like requiring the signature of more than one person,
the famous multisig wallets.
Around the same time, another improvement that made the life of users a lot easier was
adopted: Now this is a mouthful. Hierarchical Deterministic Wallets or otherwise simply
known as HD wallets (like Exodus) where a single Master Key, not just for Bitcoin but
for all assets controls all the rest of the public and private keys in the wallet. To
make matters even simpler, another improvement translates this Master Key to a number of
words, with which a user could restore all of their Private Keys and addresses in case
of a mishap. This is the famous Mnemonic Phrase, aka 12-word secret phrase or wallet seed.
On block 210,000 the reward for mining a block was reduced from 50 BTC to 25. As with the
limited supply, the halving of the mining rewards was included in Bitcoin protocol since
the beginning to limit inflation and ensure the scarcity of bitcoins. The halving happens
every 210,000 blocks, or approximately every four years, and since this first one we’ve
had two more: the second one on July 9, 2016 and the third, on May 11. The halvings will
continue until the reward drops to zero, when all 21 million bitcoins will have been issued,
and it’s expected to happen around the year 2140. After that point the miners will be
rewarded only with the transaction fees.
Halvings so far have been followed by a price increase, so a few months later, in April
2013 Bitcoin price surpassed $100 for the first time, while the market cap had broken
the $1 billion dollars threshold just a few days earlier. Bitcoin even reached $266, before
crashing again to around $100, after another exchange hack.
Around that time governments start to take notice of Bitcoin and try to figure out how
to categorize and regulate, or even control, this new digital currency. In October of the
same year, the FBI manages to shut down the infamous dark web site Silk Road and seize
its assets. Because of that incident Bitcoin starts to get portrayed as the coin of criminals
and money laundering.
During these months, Bitcoin saw a huge surge in price, going from a little over $100 in
October to breaking the $1000 barrier in November and December. But a ban from China and the
bankruptcy of Mt. Gox, both in a span of a couple of months, drove the price down again,
and Bitcoin wouldn’t reach that psychological barrier again until January 2017.
Mt. Gox, a Bitcoin exchange that dominated the market until February 2014, when it filed
for bankruptcy, after it became clear that 850,000 bitcoins had been lost over three
years and several other misappropriations had taken place. At the time, it was feared
by many Bitcoin enthusiasts that the incident could bring the death of Bitcoin.
Bitcoin has been pronounced dead several times over the years, but this was perhaps the only
time that the fears came from inside the ecosystem. Thankfully, Bitcoin persevered, as it has
always done, and Mt. Gox has since become a textbook example of the importance of not
storing your funds on an exchange.
As crypto evangelist Andreas Antonopoulos has put it: “Not your keys, not your bitcoin”,
this motto’s purpose is to instill the idea that Bitcoin was invented to allow transactions
directly between users, without the need of an intermediary.
In order, however, for someone to do that and be the true owner of their bitcoins, they
need to hold the Private Keys used to sign the transactions. When users send money to
an exchange they also transfer the true ownership of those funds to these exchanges, since the
exchange holds the private keys to the deposit addresses, not the user.
This makes it clear why it’s important that Private Keys remain secret and safe, private,
as the name implies. The Private Keys sign the transactions, and that signature is the
only thing miners need to consider a transaction valid. So, whoever controls the Private Key
to an address controls the funds in it. And if that someone is anyone else other than
the true owner of the funds, then they’re as good as gone.
But let’s get back to our timeline.
2017 was definitely a very interesting year for Bitcoin and the ecosystem in general.
Multi-million Initial Coin Offerings (ICOs), forked coins, and of course, the bull run
that brought a lot of buzz around “the new digital currency”. During the first
few months of 2017, Bitcoin is moving around the $1000 dollar mark. But after May, its
price starts climbing and climbing. From around $1300 on May 1st, it will reach almost $7500
by November 9. But the true bull run hadn’t yet come. Meanwhile, amongst the constantly
changing price and political field, Bitcoin improvements kept coming. One of the most
important improvements was Segregated Witness, or SegWit, as it’s called in short. SegWit
separated the signature and script part of the transaction from the part with the actual
transaction details, effectively increasing the block size from 1 MB to up to 4 MB, and
as a result reducing transaction fees and improving scalability, which is seen as one
of Bitcoin’s major drawbacks. Increasing the block size was a matter of much debate
in the Bitcoin community, and as a result, although the SegWit proposal existed since
2015, it wasn’t until August 2017 that it was implemented. And still not without controversy.
On August 1st, 2017, Bitcoin Cash (BCH) forked or split from BTC, with its community representing
the belief that Bitcoin should be a means of transaction, while Bitcoin Core, as the
original Bitcoin came to be known, is viewed more as a store of value. Bitcoin Cash’s
creation initiates the “era of the forks”, a period of around a year, where forks of
Bitcoin, and other famous cryptocurrencies, start popping up left and right. Most of these
coins had nothing new to offer and their sole purpose was to create coins out of thin air,
so they soon fell into oblivion. But others stuck around, like Bitcoin Gold or Bitcoin
Diamond, which both support SegWit, unlike BCH.
Currently Bitcoin can’t come even close to competing with legacy payment systems.
With a capacity of just 7 transactions per second and confirmation times of 10 minutes
on average, it’s far behind Visa’s maximum capacity of 65,000 transactions per second
and its nearly instant payments. Furthermore, because only so many transactions can fit
in a block, when the network is congested, fees skyrocket, in a bidding war between users
to get their transaction in the next block. So, what’s the upgrade that will solve all these
problems? The answer: Lightning Network. We’ll cover the lightning network in another video.
on December 17, 2017, it reached the highest price to date: $19,783. Bitcoin was
mentioned almost daily on mainstream media, driving a lot of new people to the ecosystem,
to find out what this “phenomenon” is and take part in the gains so many are already
enjoying. FOMO, the “Fear Of Missing Out” is on full throttle, driving many people to
buy bitcoins at its highest prices.
But as it had happened before, and will surely happen again, Bitcoin was on a parabolic movement,
and as its price rose, so it fell.
Bitcoin, and all cryptocurrencies, are definitely highly volatile and have seen many extreme
highs and extreme lows. But what many traders like to point out is that after each crash
it settles at a higher low than the previous one.
What are your thoughts? Will Bitcoin be able to
hold above 10k? Is a new bull run on the horizon?
We can see bitcoin’s past and the technological and financial revolution it brought is well
documented. But where do you think is Bitcoin today and what will its future hold? Let us
know in the comments below. If you enjoyed this video hit that like button and subscribe
or more crypto videos from Exodus.
Until next time… Hodl on! Or buy pizzas with bitcoin.