Bitcoin is not only the first cryptocurrency, but also the most famous of more than 5,000 cryptocurrencies that exist today. But what is Bitcoin exactly? Is it a type of currency, a store of value, a payment network, or an asset class? To delve into Bitcoin, first let’s understand its purpose.
What is the Purpose of Bitcoin’s Creation?
Bitcoin is an exclusive digital currency that can be transferred directly over the internet between two people, without intermediaries such as banks. Bitcoin operates as an alternative to traditional fiat with its existence as a form of digital money. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”
With Bitcoin, there is no need for a third party such as a bank or payment company to handle and process all transactions, making Bitcoin a more streamlined, fair, and clean payment method. Instead, someone can send payment money directly to another party: without a central authority (or the fees that come with it), the process is faster and fairer. Removing the third party gives individuals total ownership of their finances and frees them from the “trusted” third party who can exploit their funds.
From a user’s perspective, Bitcoin is nothing more than a mobile application or computer program that provides a personal Bitcoin wallet and allows users to send and receive bitcoin. This is how Bitcoin works for most users.
Behind the scenes, the Bitcoin network shares a public ledger called the “blockchain.” This ledger contains every transaction that has ever been processed, allowing user computers to verify the validity of each transaction. The authenticity of each transaction is protected by a digital signature that corresponds to the sender’s address, allowing all users to have full control over sending bitcoin from their own Bitcoin address. In addition, anyone can process transactions using specialized hardware computing power and receive rewards in the form of bitcoin for this service. This is called “mining.“
A Brief History of Bitcoin
Bitcoin is the first implementation of a concept called “cryptocurrency“, first described in 1998 by Wei Dai in the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority. He published a paper discussing “B-money“. He discussed the idea of a digital currency that could be sent with a group of digital pseudonyms that could not be traced. In the same year, another effort called Bit Gold was designed by blockchain pioneer Nick Szabo. Bit Gold also aimed to create a decentralized digital currency. Szabo’s idea was driven by inefficiencies in traditional financial systems, such as requiring metal to make coins and reducing the amount of trust needed to make transactions. Although neither was officially launched, they are part of the inspiration behind Bitcoin.
The specifications and proof of concept for Bitcoin, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” were published in 2009 on the cryptography mailing list by Satoshi Nakamoto. Soon after, the paper spread to almost every corner of the internet, especially among mainstream cryptography researchers.
Within the paper, Satoshi Nakamoto introduced the blockchain network and explained how it could massively improve financial systems, especially on the internet. Comparing it to a digital ledger, the creator described blockchain as a decentralized peer-to-peer network that doesn’t require trust. Additionally, he focused on how blockchain doesn’t require intermediaries.
Satoshi left the project at the end of 2010 without revealing much about himself. The community has grown exponentially with many developers continuing to improve Bitcoin.
Who is Satoshi Nakamoto?
One of the most popular mysteries of Bitcoin is the identity of its founder, Satoshi Nakamoto, which is an alias. Little is known about him. Although many attempts have been made to uncover his identity, Nakamoto has proven difficult to identify. Several individuals have been proposed, but none have been proven to be Satoshi Nakamoto without any doubt.
In March 2014, Newsweek identified Dorian Nakamoto as the creator of Bitcoin. The publication of the article caused a stir in the crypto world and the wider technology community, as it was the first time a mainstream publication tried to uncover the identity of the creator of Bitcoin. Newsweek claimed some similarities between Satoshi Nakamoto and Dorian Nakamoto. For example, both were suspected of having libertarian tendencies and Japanese connections. (Dorian, who graduated from Cal Poly Pomona with a degree in physics and worked on secret defense projects, is Japanese-American). The article’s author also claimed that Nakamoto stated that he was “no longer” involved with Bitcoin and that he had “passed it on” to someone else. Dorian Nakamoto later denied the quote and claimed he had misunderstood the question. He told the Associated Press, “I have nothing to do with it.”
Most individuals suspected to be Satoshi Nakamoto have denied the claims or remained silent. This was not the case for Craig Wright, an Australian scientist. In December 2015, Wired Magazine wrote a profile on Wright, claiming he had “obtained the strongest evidence of the true identity of Satoshi Nakamoto.” The article reported on Wright’s appearance via Skype at that year’s Bitcoin Investor Conference in Las Vegas. When asked about his credentials, Wright claimed he was “a little bit of everything.” He listed his degrees, including a master’s in statistics and two doctorates. He also said, “I’ve been involved in all of this for a long time… I’ve been trying to keep my head down.”
The Wired evidence consists of references to “cryptocurrency writing” in Wright’s blog that appeared several months before the release of the Bitcoin whitepaper. In addition, there are leaked emails and correspondence with Wright’s lawyer referring to a “P2P distributed ledger.” Furthermore, leaked transcripts of meetings with lawyers and tax officials quote him as saying, “I did my best to try and hide the fact that I’ve been running Bitcoin since 2009. In the end, I think half the world will know.”
The claim immediately raised doubts. Wired followed up its report to note several inconsistencies in Wright’s story. For example, the blog entry appears to be outdated. The evidence also shows that the public encryption key associated with Satoshi Nakamoto is also outdated. Even one of Ethereum’s founders, Vitalik Buterin, who is reluctant to comment on politics in the cryptocurrency world, openly called Wright a fraud.
The most plausible candidate may be Nick Szabo. Nick Szabo is a computer engineer and law scholar. He is appreciated for pioneering the concept of smart contracts in a 1996 paper. In 2008, he conceptualized a decentralized currency he called Bit Gold, a predecessor to Bitcoin. He described Bit Gold as “a protocol in which expensive bits cannot be forged online with minimal reliance on trusted third parties.” This is similar to the concept of Bitcoin.
Author Dominic Frisby attempts to make the case that Nick Szabo is Satoshi Nakamoto in his book titled ‘Bitcoin: The Future of Money?’ Frisby consulted a stylometry expert who concluded that Szabo’s writing style is similar to famous writings of Satoshi. Other clues are that both Szabo and Satoshi reference economist Carl Menger. Additionally, Frisby knows Szabo has worked for DigiCash, an early effort to bring cryptography to digital payments. In the author’s view, all of this strongly supports the possibility that Nick Szabo is Satoshi Nakamoto.
Bitcoin Price History
For most Bitcoin investors, the past ten years have been a rollercoaster ride. Despite daily volatility, where double-digit increases and price drops are not uncommon, they have had to face many issues that disrupt its ecosystem, from various scams and fraudsters to the absence of regulation that adds to its volatility. Despite all of this, there have been periods when cryptocurrency price changes have even surpassed their usually fluctuating changes, resulting in massive price bubbles.
When Bitcoin was first introduced in 2009, it was worth $0. In 2011, this cryptocurrency reached the level of $1 for the first time. Bitcoin prices surged from $1 in April of that year to a peak of $32 in June, a 3200% increase in just three short months. The sharp increase was followed by a sharp recession in the crypto market, and the price of Bitcoin hit its lowest point at $2 in November 2011. There was a slight increase the following year, and prices have risen from $4.80 in May to $13.20 on August 15.
2013 proved to be a pivotal year for Bitcoin prices. The digital currency started trading this year at $13.40 and experienced two price bubbles in the same year. The first occurred when prices soared to $220 in early April 2013. The rapid increase was followed by an equally rapid price drop, and this cryptocurrency changed hands at $70 in mid-April.
But that was not the end of Bitcoin’s price action. Another rally (and corresponding drop) occurred towards the end of that year. In early October, the cryptocurrency was trading at $123.20. By December, it had surged to $1,156.10, but dropped to around $760 three days later. The rapid changes signaled the start of a years-long decline in Bitcoin’s price, touching a low of $315 in early 2015.
The fifth price bubble occurred in 2017. The cryptocurrency was hovering around the $1,000 price range at the beginning of that year. After a brief dip in the first two months, the price saw an incredible increase from $975.70 on March 25 to $20,089 on December 17.
The 2017 hot streak also helped firmly put Bitcoin in the mainstream spotlight. Governments and economists began to take notice and develop digital currencies to compete with Bitcoin. Analysts debated its value as an asset even as many called experts and investors made extreme price predictions.
As in the past, Bitcoin’s price moved sideways for the next two years. Among them, there were signs of life. For example, there was a resurgence in price and trading volume in June 2019 and the price surpassed $10,000, reigniting hopes for another rally. But it dropped to $7,112.73 in December of the same year.
It wasn’t until 2020, when economic activity was shut down due to the pandemic, that Bitcoin’s price became active again. The cryptocurrency started the year at $7,200. The pandemic-related closures, and subsequent government policies, added to investor fears about the global economy and accelerated Bitcoin’s rise. On November 23 closing, Bitcoin was trading at $18,353.
The pandemic devastated most stock markets in March but subsequent stimulus checks of up to $1,200 may have had a direct effect on the market. After the release of the checks, the entire stock market, including cryptocurrency, experienced a huge rebound from its March lows and even continued to break previous all-time highs.
This check further reinforced concerns about inflation and the potential weakening of the purchasing power of the US dollar. Money printing by governments and central banks helped strengthen the narrative of Bitcoin as a store of value because its supply is limited to 21 million. This narrative began to attract institutional interest, not just retail investors, who were largely responsible for the price increase in 2017.
Sustained institutional interest in cryptocurrency further pushed its price up and Bitcoin reached just below $24,000 in December 2020, up 224% from the beginning of 2020. It took Bitcoin less than a month to break the previous price record and surpass $40,000 in January 2021. At its peak, the cryptocurrency changed hands at $41,528 on January 8, 2021. However, three days later, it was at $30,525.39. The latest record was when Bitcoin jumped to an all-time high of $69,044 on November 10, 2021.
Is Bitcoin Really Used by People?
There are increasingly more businesses and individuals using Bitcoin. This includes physical businesses such as restaurants, apartments, and law firms, as well as popular online services like Namecheap and Overstock.com. While Bitcoin remains a relatively new phenomenon, it is growing rapidly. In May 2018, the total value of all bitcoins in existence exceeded $100 billion USD, with bitcoins worth millions of dollars being traded every day.
In addition, El Salvador made Bitcoin legal tender on June 9, 2021. A significant moment for bitcoin and crypto at large, El Salvador is now the first country to recognize BTC as a form of payment for all forms of monetary debt. While the announcement was surprising, El Salvador is a prime example of a country that can benefit from BTC adoption.
El Salvador’s announcement has drawn attention from other countries curious about adopting bitcoin. But it has also caught the eye of regulators and governing bodies such as the International Monetary Fund (IMF), which said El Salvador’s decision raises “macroeconomic, financial, and legal issues.”
Currently, there are around 18.4 million addresses that hold at least 0.001 BTC – an impressive number for a decentralized currency, but still only a small fraction of the world’s population. There will undoubtedly be more pushback and challenges as El Salvador begins to adopt BTC on a larger scale. But if El Salvador’s experiment goes well, it could be a turning point for large-scale BTC adoption worldwide.