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Most of us will have become familiar with cryptocurrencies through hearing about their wild price swings rather than their underlying technology or potential use cases. The incredible rise in the value of top cryptocurrencies continues to provide crazy rags to riches or ‘what could have been’ stories. But aside from its crazy volatility, what is its history?
In the 1980s, cypherpunks and crypto-anarchists resented that large banks and governments could track current account balances and transfers at the expense of privacy. They perceived the need for anonymous digital transactions, which would drive the early adoption of digital currency. The primary goal of Bitcoin, today’s most famous cryptocurrency, is to provide an anonymous, trustless (see below), and decentralised currency. There were some failed attempts to create cryptocurrencies before Bitcoin. Still, the features of these early cryptocurrencies, such as blind signatures, proof of work, and distributed record-keeping, were incorporated into Bitcoin and, importantly, solved the double-spending problem. We’ll discuss that further later in the article.
When talking about crypto, trustless means that no third party (such as a bank) is acting as a central authority positioned between you and your holdings. Trust is not necessarily removed but rather minimised. Users place their trust in the system as a whole without the need to trust, or know of, other parties involved.
When placing your trust in a centralised, traditional financial system, you are placing your trust in a central authority, such as a bank, which is controlled by people. In a trustless system, you are placing your trust in the computer code which governs the system.
Blind signatures, invented by cryptographer David Chaum, allow users to sign off on transactions anonymously. In 1995, David Chaum built this feature into his coin, DigiCash, used to conduct anonymous online transactions using cryptographic protocols, preventing banks and government officials from tracking online payments. The inability of this coin to validate digital signatures in the DigiCash system caused it to fail.
To limit email spam, Hashcash was created as a deterrent to spammers. A cryptographic hash puzzle must be solved for the user to send an email; this is an example of proof-of-work, the consensus algorithm later used by Bitcoin to validate transactions and broadcast new blocks to the blockchain. A Hashcash stamp would be added to the email header for the user to send an email. By looking for the Hashcash stamp, email recipients could verify their email's legitimacy. The concept of this product was fantastic, but the execution was lacking due to the high cost of validating every stamp. The goal of spam emails is to send out a large number of emails at a low cost.
In 1998, through record-keeping, the creator of B-money implemented an anonymous, distributed electronic cash system. A database copy indicating who owns what and work verified by the community would be kept and updated in a collective ledger. Transactions are verified using collective bookkeeping and authenticated cryptographic hashes. Workers are compensated for their efforts in generating money by expending computational resources. Contracts and transactions are enforced by broadcasting them and signing them with digital signatures.
In 1998, Nick Szabo proposed Bit Gold, which required a user to allocate computing power to solving puzzles for rewards. Szabo’s Bit Gold never took off due to his inability to solve the double-spending problem (digital data being copied and pasted) without a central authority. Bitcoin would go on to solve this problem.
In 2008, up stepped an anonymous figure, known as Satoshi Nakamoto, founding the domain bitcoin.org. Here lay the ‘Bitcoin whitepaper’, which explained how Bitcoin could revolutionise today’s monetary system.
During its early years, Bitcoin had next to no value. But in 2010, a historical moment took place as programmer Laszlo Hanyecz became the first individual to purchase a tangible asset (two pizzas) using 10,000 Bitcoin.
As of October 2023, that 10,000 Bitcoin would be worth $338 million.
Since then, cryptocurrency has grown to a market cap of $1.3 trillion (as of October 2023), turning a few heads along the way. However, it hasn’t been plain sailing along the way!
(market cap = total value of all coins that have been mined... based on the latest traded price)
In 2013, the cryptocurrency market began to comprise many alternatives to Bitcoin (see below). Criminal, government, regulatory, software related issues riddled the industry. But amongst this, Bitcoin hit a peak price of $1,100, and its market cap surpassed $1 billion for the first time. Bitcoin, and cryptocurrency in general, would then enter a bear market for the next 3-4 years.
Arguably cryptocurrency’s darkest day came in January 2014 when Mt Gox, one of the original Bitcoin exchanges, famously lost/stole 850,000 Bitcoin from its users in a hack that had been ongoing for years.
Luckily, today’s cryptocurrency exchanges have much-improved reserve holding procedures. But still, the Mt Gox story serves as a reminder to all cryptocurrency users that sensible measures should be taken to best secure any amount of cryptocurrency holdings.
“Not your keys, not your coins” - Crypto folklore, circa 2009
Since this tough period, cryptocurrency has continued its bull/bear market patterns and mostly survived whatever scrutiny has come its way. Now, Bitcoin is far from the only cryptocurrency with a $1billion+ market cap, with 44 (as of October 2023) others following suit.
As of 2023, the world has begun to embrace the potential of blockchain technology (the technology underlying all cryptocurrencies). Blockchain use cases vary from proof of provenance along supply chains for food or precious products such as diamonds and metals to simplification of finance systems and applications in healthcare.
In addition, the cryptocurrency market has developed significantly in recent years, with workable regulation and new advancements such as DeFi and NFTs bringing new knowledge and capital to the sector.
Unfortunately, the 2020-2022 bull market was accompanied by some damaging events.
In May 2022, Terra’s USD algorithmic stablecoin collapsed, wiping out $40bn in market value from the crypto ecosystem.
Terra’s downfall had knock on effects elsewhere in the sector, particularly with lending firms. In July 2022, Celsius, one of the crypto’s largest lenders, filed for bankruptcy. In June, though, Celsius customers were unable to withdraw funds and later revealed that Celsius CEO Alex Mashinsky could withdraw $10m during the period.
The biggest scandal arrived in November 2022 with the collapse of the crypto exchange and hedge fund FTX.
In November, reports emerged that financial statements leaked from FTX and its trading arm Alameda Research were questionable and raised concerns about the health and liquidity of both companies. Journalist Ian Allison revealed that a large portion of the $14.6 billion in assets held by Alameda Research was in FTX's token, FTT. The news caused panic among holders of FTT, as there were concerns that margin calls on loans secured by these assets could result in a significant decrease in the value of FTX's token. The situation escalated when Binance CEO Changpeng Zhao tweeted that his exchange would liquidate its holdings in FTT. This caused a bank run on the FTX exchange and ultimately led to the bankruptcy of FTX on November 17th. The CEO of FTX, Sam Bankman-Fried, was later arrested and charged by the SEC with defrauding investors out of $1.8 billion.
A BRIEF HISTORY OF CRYPTOCURRENCY. COMPLETED. ✅
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