Depending on how you count its birth, bitcoin turned 10 years old today. The first lines of code were committed to the bitcoin blockchain on January 3rd, 2009, a few months after the publication of the original whitepaper. These lines of code, known as the “genesis block,” are credited to the person or persons known as Satoshi Nakamoto.
On January 12th, Nakamoto sent 10 bitcoin to Hal Finney, and a new finance counterculture was born. At this point, the bitcoin’s worth was negligible. Users essentially gave each other bitcoins as rewards for good comments in forums. The first “real” transaction took place on May 22nd, 2010. Laszlo Hanyecz bought two pizzas for 10,000 bitcoin, or about $30. (At current prices, 10,000 bitcoin would be worth $38 million. I hope that pizza was tasty.)
For most of its life, bitcoin drew from three main overlapping communities: the small community of original investors and true believers, the blockchain technology aficionados, and the speculators who are just here to make some money, ma’am. Lately, another community has emerged: old-fashioned stodgy finance types.
Originally, bitcoin was money with a philosophy: instead of a central bank, it had programming and Nakamoto’s whitepaper, both of which suggested skepticism about ordinary financial institutions. But Nakamoto vanished. As the digital currency took off, the system that was supposed to work without trust developed trust issues. And as the bitcoin’s price has risen, it’s become another investment vehicle for the financial system it was meant to replace. 10 years later, bitcoin is part of the system it was meant to overthrow.
BORN FROM CRISIS
If you had asked me 10 years ago, I would not have imagined finance could have a counterculture. But in 2008, as the banking crisis was in full swing, a group of anarchists, libertarians, and other dissatisfied tech-savvy true believers created one. (There had been other attempts at digital cash, but none of them truly took off.) In August 2008, someone registered bitcoin dot org as a domain; on Halloween that year, a paper went up describing a decentralized system for electronic transactions that didn’t rely on trust. The original Satoshi Nakamoto white paper begins (emphasis mine), “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
You can see the influences of the banking crisis on bitcoin’s ideology: first of all, it’s a specific distrust of financial institutions. Beyond any number of other breaches of trust that took place during the financial crisis, a money market fund called the Reserve Primary Fund did something very scary: it broke the buck. If you had invested $1, you’d get 97 cents back. This was because the money market fund had invested in Lehman Brothers, a financial firm that had just gone belly-up.
Money market funds, at the time, were considered as safe as an actual savings account; $3 trillion had been invested in them as of September 2008, according to USA Today. But they aren’t as safe as savings accounts, which is why they had better rates of returns — as investors found out, to their surprise and dismay. (Regulations around money market funds have subsequently changed.)
Contamination from the Lehman bankruptcy spread into the wider financial markets, making it clear how closely banks were tied together. There are several ways to respond to this: one is to strengthen financial regulations, tweak the system, and leave it running, hopefully in a more stable way. Another response is to create a new system without these specific hazards. Suddenly, a lot of people were in the mood to take bitcoin seriously.
Bitcoin highlights how fundamentally bizarre money is. In some sense, money isn’t “real” in the way that a tree is. It’s a human invention, a value token that makes exchange easier. But it’s real enough — people fight and die for it, empires fall for lack of it, and I would personally go homeless if I did not use it to pay my rent. Money is like Tinkerbell in Peter Pan: it’s real if enough people believe in it. And in 2009, a lot of people were looking for alternatives to the mainstream financial system that had catastrophically failed. The core of banking, as most people understand it, is money. But what does money look like when the bankers are taken away? Of all the previous attempts at internet-based currency — and there were many — bitcoin was the one that broke out as the best possible alternative to society’s collective anxieties around the financial system.
INTO THE UNDERWORLD
Bitcoin is structured in a way that reveals its ideology. The idea of a peer-to-peer money network hews back to old-fashioned Silicon Valley disruption. You don’t have to pay a fee to send money to a third party like a bank or Western Union. But the original ideology is even more radical than that: if you believe that the state is simply a designated force for violence, then it’s possible to also believe that fiat currency — for instance, the dollar — is an enforced state monopoly. Bitcoin upends that monopoly, serving in part as a currency-based way to hate the government.
Even the term “mining” conveys some of this thought: many investors see bitcoin as a commodity, like gold. (Let’s genuflect at the gold standard and keep it moving.) There’s also the finite nature of bitcoin: under the current protocol, there can only be 21 million bitcoin in the world. More than 17 million have already been mined. The rest will be released at a predictable mining rate, which has slowed as more of the supplies have come into existence. No central bank or president can make that system run any faster or goose inflation to suit their political agenda.
The other key technology for dodging banking institutions — and the state — is the distributed ledger. Anyone can access the public parts of the “blockchain,” a ledger of all transactions made over time. No institution, at least in theory, is required to ensure trustworthy transactions. If you can keep your wallet anonymous, they don’t even need to know who you are.
But as the last decade has made clear, removing trust as a component in one part of the financial system means that trust problems pop up somewhere else, which is how the counterculture formed. In order to make your investment in bitcoin worthwhile, you had to convince others that the investment was worthwhile too. Bitcoin communities sprang up on platforms like IRC and Reddit.
The most significant community for early bitcoin, though, was dark web marketplace Silk Road. Founded by Dread Pirate Roberts — who would later be revealed as Ross Ulbricht — the promise of Silk Road was also essentially libertarian. The idea was that anything could be traded, regardless of whether the state viewed it as legal. The trade was dominated by marijuana, fake IDs, benzos and other prescription drugs that were all facilitated by bitcoin. When the Silk Road was seized by the US government in 2013, that seizure included 144,336 bitcoins that belonged to Ulbricht.
The closure of Silk Road was the end of bitcoin’s beginning. It was perhaps the moment it became clear that removing financial institutions from money would not necessarily mean a more trustworthy environment, and it also didn’t guarantee protection from the state. When Mt. Gox filed for bankruptcy, that would solidify bitcoin’s trust problems.
Mt. Gox (“Magic: The Gathering Online eXchange”) wasn’t originally founded for bitcoin, but it launched a bitcoin exchange early in 2010. Mt. Gox let people buy bitcoin and sell using bank transfers; in 2011, its founder, Jed McCaleb sold it to Mark Karpelès. The early years of Mt. Gox demonstrated that online currency meant new risks: “hacks, outages, a run-in with the US government, and a $75 million lawsuit,” Adrianne Jeffries wrote for The Verge.
Mt. Gox filed for bankruptcy in 2014 after clients complained that they couldn’t withdraw their bitcoin. Its failure could have been catastrophic; Mt. Gox was responsible, by some estimates, for 70 percent of all bitcoin ever traded as of February 2014. “Behind the scenes,” Jeffries wrote, “Karpelès had discovered that an attacker had slowly been draining all of Mt. Gox’s bitcoins without being noticed. The company filed for bankruptcy in February 2014, citing $64 million in liabilities.” Bitcoin’s price skyrocketed in the years that followed, which let at least some of the creditors cash out at 2014-era rates, but that wasn’t the real problem. The promise of bitcoin was that your money wouldn’t be held hostage by a failing bank, but that’s exactly what had happened.
Mt. Gox and the other exchanges function essentially as the bitcoin version of commodity exchanges, simplifying the experience of trading bitcoin. They allow people to set the rate for bitcoin (and other cryptocurrencies), move from fiat currency (state-issued, like dollars) into cryptocurrency, and buy and sell cryptocurrencies. Their existence made it easier for ordinary plebs to get into bitcoin, and they brought new kinds of security risks, too. Some of the troubles Mt. Gox had early on plagued later exchanges like Coinbase and suggested that digital money had new problems that paper-based money did not. While you could break into my house and steal the $40 sitting next to my laptop, this is time-intensive for little reward. Figuring out how to hack the exchanges, however, could lead to tens of millions of dollars from a single breach.
Regular banks and exchanges aren’t immune to hacking, but they pour money into making themselves harder targets. Bitcoin exchanges, however, “may not have had the capital on hand, time, or even the technical ability to ramp up security features fast enough to ward off potential attackers,” John Sedunov, an assistant professor of finance at Villanova University, told The Washington Post in 2018.
BUILDING A SMARTER COIN
But even as Mt. Gox melted down and the Silk Road got busted, bitcoin continued to enter the mainstream. At the end of 2014, Microsoft began accepting bitcoin payments, according to Cointelegraph. In 2015, bitcoin was a cover story in The Economist. During this period, other cryptocurrencies — also based on the blockchain — began to emerge, the most important of which was Ethereum, launched in 2014, with an initial coin offering (ICO) that raised $18 million.
Ethereum was the beginning of another big shift in the community: the change in focus from bitcoin per se to blockchain as a technology. Using the blockchain, Ethereum lets users write applications and make money from their work. The best-known application is the “smart contract.” (Though this technology bills itself as a way of replacing lawyers, it is incredibly difficult to get lawyers out of anything once they’ve dug in. Just saying!) Here’s a very reductive way of establishing a smart contract: let’s say you and I have agreed that if I write you a history of bitcoin, you’ll send me $10 on my birthday this year. We can do that via a legally enforceable contract, which involves lawyers, notaries, and so on — or we can do it via Ethereum. In the latter case, you put $10 worth of smart coins in escrow, and when the terms of the contract are met, those coins are released to me. If I don’t meet the terms of our agreement, the coins are released back to you.
While Ethereum was the most meaningful of these companies, plenty of other ICOs came into existence: NXT Neo, Spectrecoin, Stratis, and EOS among them, often tied to specific businesses and products. The expanded universe of blockchain technology — a term absolutely no one agrees on, incidentally — took shape as various governments woke up to these new cryptocurrencies as taxable, potentially regulatable investment vehicles. In 2017, the US Securities and Exchange Commission (the money cops) announced that under some circumstances, financing events for digital currencies would be regarded as securities, and it proceeded to file suit against a string of scammy coin projects for violating securities law.
Now, depending on your attitude, this is potentially a way of legitimizing cryptocurrency (“it’s so real that the government is choosing to regulate it as an investment vehicle!”) or a betrayal of the initial government-free promise upon which the Nakamoto entity launched bitcoin. Increasingly, though, bitcoin had left behind its original community of true believers.
During 2017, bitcoin’s price surged more than 1,000 percent, which may explain why it was the focus of such intense interest by people who, you know, make money professionally. (Later, a University of Texas finance professor suggested that half of this rise was due to market manipulation.) On December 17th, 2017, bitcoin hit its all-time high of $20,000. Cryptocurrency-related crime surged as well — even though, by August 2018, a DEA agent told Bloomberg that the majority of bitcoin transactions were by speculators, rather than the black market types that dominated bitcoin during the Silk Road days.
2018 was rougher for those speculators, as bitcoin fell off 80 percent from its high the year before. And as its price fell, most people’s interest waned, but not that of finance professionals who can make money when assets increase or decrease in value.
As of this writing, cryptocurrencies generally — and bitcoin specifically — were being traded by the likes of venture capital firms (with boosters like Tim Draper of Draper Fisher Jurvetson and Marc Andreessen of Andreessen Horowitz), hedge funds, mysterious bitcoin “whales,” and mainstream investors like George Soros. Goldman Sachs, in particular, has reportedly considered entering the space. Pending exchange-traded funds (ETFs) could let investors trade cryptocurrencies like stocks, tying digital currencies ever closer to the system they were initially meant to replace.
Outside of the financial community, bitcoin’s unexpected popularity has come with a cost. So many people are mining bitcoin that the powerful chips used by scientists have doubled in price, making it more difficult for astronomers, among others, to do their jobs. Bitcoin mining also consumes a lot of energy and produces a lot of emissions, which is making climate hawks nervous.
No one has discovered who Satoshi Nakamoto was or is, though many have tried. There have been several pretenders to the crown, but no one has ever provided the definitive proof: trading Nakamoto’s bitcoin. The crisis in confidence in the banking system appears to have passed. But the biggest winners from the new bitcoin era may very well be the people the system was designed to bypass: institutional investors and banks.
Correction: An earlier version of this piece referred to ETFs allowing cryptocurrencies to be traded on exchanges. In fact, no such proposals have yet been approved by the SEC, although a number are pending. The Verge regrets the error.