What is the history of cryptocurrency?
Cryptocurrency is no doubt one of the biggest disruptors in financial technology of this generation. From the advent of Bitcoin to the growth of thousands of cryptocurrency coins and projects, digital currencies are now a mainstay around the world.
But what exactly is cryptocurrency, who invented it, when did it start, and how did it become as big as it is today?
Although cryptocurrency was designed to be a secure form of payment, it has grown beyond its creators’ expectations. To find out how it all started, we have to go back to the very beginning of cryptocurrency, which finds its roots farther back than you might think.
History of Cryptocurrency
Cryptocurrency is a form of digital currency on a peer-to-peer payment network known as the blockchain.
Although the concept of cryptocurrency has been around long before Bitcoin was created, it didn’t become a household term until Bitcoin became a tradable asset. Today, the entire crypto market has grown in value to over $1 trillion, making it an entirely new financial asset class.
Digital currencies are much older than most people think, and the concept of cryptocurrency was created more than 20 years prior to Bitcoin. Here is a brief history of cryptocurrency, how it has evolved over time, and where it is headed in the coming years.
Early Cryptocurrency (1983 – 2009)
If you want to understand how cryptocurrency got where it is today, we have to rewind the clock back to the 1980s.
The idea of a cryptographically secure network for digital payments originated with David Chaum, a computer programmer and cryptographer who wrote a dissertation in 1983 on how to create secured digital cash. Using cryptography and what David coined “blind signatures,” banks or other institutions could transfer funds anonymously and securely.
While this cryptocurrency did not use blockchain technology, it was the first version of a digital currency that could be transferred anonymously with no centralized authority required to confirm the transaction. Chaum went on to create the digital currency and called it DigiCash in 1990.
Fast-forward a few years, and Nick Szabo created another digital currency called Bit Gold. It took Chaum’s idea a step further, requiring a user to dedicate computer power to solve cryptographic puzzles and validating transactions on a public ledger, very similar to what is now known as the blockchain. In fact, although Szabo’s project was never implemented, the ideas behind Bit Gold helped pave the way for cryptocurrency.
Although these projects didn’t end up having global reach, the idea of a digital currency that could be securely transferred without a central authority (such as a bank) would eventually give rise to a more complete and robust digital currency that would change the world — yes, really!
Bitcoin & the Blockchain (2009 – 2011)
In 2008, a cryptographer who went by the pseudonym “Satoshi Nakamoto” distributed a white paper to a mailing list about a digital currency called Bitcoin. The paper was named “Bitcoin: A Peer-to-Peer Electronic Cash System,” and outlined the idea of a peer-to-peer network and a public ledger of all transactions called the “blockchain.”
The goal of the Bitcoin blockchain network is to incentivize individuals to host servers to process Bitcoin transactions. The network of individual computers and servers use computing power to process transactions, as well as validate them (confirm they are real), and the reward for processing these transactions is a number of Bitcoins. In the early days, Bitcoin was rewarded more generously — the reward for one block was 50 Bitcoins.
Nakamoto launched Bitcoin by mining the first “block” of the blockchain in 2009, thus creating the first block of transactions on the blockchain and mining the first 50 Bitcoins. The website Bitcoin.org was created to house the project, and the BitcoinTalk.org forums became a popular place for programmers and users to discuss all things Bitcoin.
Bitcoin Market Value Increases
Over time, the decentralized network grew, and more and more Bitcoins were mined and subsequently traded, giving Bitcoin a market value. While there was no official value for Bitcoin in the beginning, the first official retail transaction was an exchange of 10,000 Bitcoins (worth over $300 million today) for two pizzas.
Most early Bitcoin transactions were simply negotiated between two parties, and one Bitcoin amounted to a few cents in value. But by 2011, the price of one Bitcoin was valued at over $1.00, giving it parity with the U.S. dollar.
From there it continued to increase in price. When Forbes and Gawker published feature stories on Bitcoin, the price went up quickly, rising as high as $29 per Bitcoin in 2011, before dropping back down to $3 to $4.
Although Bitcoin was gaining some media attention and transaction volume, its price experienced slow and steady growth for the first few years.
Altcoins Emerge (2011 – 2021)
While Bitcoin was the first and most popular cryptocurrency, other projects decided to launch their own digital currencies in hopes of improving on Bitcoin’s original design. Because the first new cryptocurrencies emerged by copying the source code from Bitcoin and altering it, they were dubbed as Alternative Coins, or “Altcoins.”
The first two popular altcoins were Namecoin (NMC) and Litecoin (LTC). Both of these projects borrowed the concept of blockchain technology from Bitcoin, but aimed to make small improvements to the code. Litecoin produced faster transactions, and Namecoin was nearly identical to Bitcoin, but focused on censorship-resistant domain names.
Although Namecoin is still around, it doesn’t have much value, but Litecoin has continued to grow and process transactions, and is still one of the most popular cryptocurrencies today.
As of April 2013, there were only seven cryptocurrencies that were traded, according to a historical market snapshot by CoinMarketCap.
By the end of the year, there were over 60 tradable cryptocurrencies, with more being launched monthly. Most of these were simply copies, or “forks” of the Bitcoin network and code, and although a few remain popular, many hold no value today.
In fact, 2013-2014 was marked by a massive cryptocurrency bull run, where the value of Bitcoin and other crypto exploded in growth. Bitcoin rose from a value of about $14 in the start of 2013 to a high value of over $1,200. This surge created quick Bitcoin millionaires and gave Bitcoin even more mainstream attention.
Unfortunately, the growth did not last, and the market crashed hard, with Bitcoin bottoming-out at around $300 by the end of 2014. This frenzy of market activity burned some investors out on the volatility of Bitcoin and other cryptocurrency, but it would become a hallmark of crypto trading.
Exchange Hacks and Illegal Activity
With Bitcoin rising in value and crypto exchanges popping up left and right, more and more high-profile hacks started happening. Among the highest-profile hacks was one on the Mt. Gox exchange, which saw over 850,000 Bitcoins stolen from users and the exchange itself, which was a loss of over $470 million at the time.
In addition to stolen Bitcoin and large exchange hacks, Bitcoin became infamous for its use for criminal activity as well. The most famous was a website called Silk Road that allowed users to pay for drugs and other illegal items with Bitcoin only. Due to the anonymous and secure nature of the blockchain, illegal activity flourished, causing regulators and justice systems around the world to take notice.
Although criminal activity likely continues to this day, the fact that the Bitcoin blockchain is a public ledger does not make it totally anonymous.
Initial Coin Offerings (ICOs) (2015 – Present)
In 2015, a group of programmers including Vitalik Buterin launched a project called Ethereum to help build a foundational layer for other crypto projects to build on top of. Ethereum introduced the idea of smart contracts, which are programs that execute automatically based on certain criteria, as well as the idea of decentralized applications.
Ethereum also participated in an initial coin offering (ICO) to raise capital for its project. Similar to stock IPOs, an ICO can help raise money for an upcoming project, giving investor’s early access. After the success of Ethereum, ICOs became increasingly popular in 2017, with websites tracking the launch of new projects, and millions of dollars in Bitcoin flowing into new projects weekly.
While these ICOs helped projects launch and quickly gain momentum, many of them ended up being scams, where founding teams disappeared with the capital raised, and the value of the tokens provided quickly sank to zero. The U.S. Securities and Exchange Commission (SEC) stepped in to give investors a stern warning against participating in ICOs, and many platforms now ban U.S. users from joining any ICO capital-raising event.
While ICOs are still popular today, regulators are taking more notice, and some countries are even banning them outright.
Today, Bitcoin has grown to an impressive market cap of almost $1 trillion, and cryptocurrency as a whole reached a $2 trillion market cap early in 2021. This growth is due in part to the participation of institutional investors purchasing Bitcoin and other cryptocurrencies, as well as some countries even adopting Bitcoin as legal tender.
Bitcoin is still the king of cryptocurrency, holding over 35% of the total market capitalization, and with a price of about $35,000 per Bitcoin (BTC). Ethereum is the only close second, at roughly half the market cap of Bitcoin. There are now over 10,000 cryptocurrencies globally, with new projects launching on dozens of networks every month.
Bitcoin is not without controversy, though, with countries such as China banning Bitcoin altogether. Others, like El Salvador, have adopted it as legal tender. The SEC and U.S. government continues to take interest in Bitcoin and other cryptocurrencies, calling for regulation.
Central banks around the world are also taking interest in creating their own digital currencies, called central bank digital currencies (CBDCs), due to the growing demand for a fully-digital money system.
The crypto sector has expanded as well, with new, innovative projects launching gaming platforms, fiat-backed stablecoins, artist marketplaces, and even digital real estate in the metaverse. Probably the most important recent advancement in cryptocurrency has been the advent of non-fungible tokens, or NFTs.
An NFT is a unique digital token of ownership of an asset recorded on the blockchain. This means NTFs offer a unique digital signature (like a product serial number), and the holder of the NFT effectively owns the digital asset it is attached to.
NFTs cannot be divided or exchanged, which is what makes them “non-fungible.” Each NFT is unique, which makes it perfect to attach to real world assets, as well as unique digital assets, such as artwork.
The first NFT was created in 2014 by digital artist Kevin McCoy, and recently sold for $1.4 million at a Sotheby’s auction. But NFTs didn’t gain popularity until 2020 and into 2021, as NFT marketplaces for digital artists grew at a rapid pace. Platforms such as OpenSea allow users to buy and sell NFTs, with prices being listed in native cryptocurrency, such as Ethereum (ETH) or Solana (SOL).
Celebrities are jumping on the NFT art bandwagon too, minting their own digital art pieces for sale, and creating online communities around their personal brands. NFTs are also allowing musicians to control the rights to their music, with the ability to sell off ownership rights as digital tokens.
NFTs are just gaining steam in 2022, with new applications and opportunities continuing to be created. The future is yet to be written for NFTs, and some even predict NFTs could be bigger than Bitcoin.
While Bitcoin itself does not have a long history, the idea for a secure, decentralized payment system has been around for almost 40 years. Bitcoin is a fully-realized version of what pioneers Chaum and Szabo had in mind, and it has captured the attention (and wallets) of the entire world.
That being said, cryptocurrency is still in its infancy, and with massive innovation comes massive volatility. While investors might like to see the price of Bitcoin and other cryptocurrency stabilize in the coming years, we are witnessing the birth of a new asset class, and can expect a high level of volatility as this new sector continues to take shape.
As for the technology. Bitcoin has proven itself a robust and secure payment network, which has an entire development community behind it to continue improving the network. Many other cryptocurrencies and blockchains have launched, transforming the world of finance, art, and many other industries to come.
With Bitcoin continuing to see institutional and government adoption, as well as the difficulty of mining more Bitcoin increasing every four years, there seems to be no stopping the growth in the adoption (and value) of Bitcoin.
As for altcoins and NFTs, the future shows promise of digitizing ownership of real-world assets, such as property and rights to intellectual property. There are many industries ripe for disruption, and cryptocurrency and blockchain technology seems to be where many innovators are flocking.
All that being said, there are challenges ahead as well. Pending government regulation of cryptocurrency, the rise in scams, and the introduction of competing central bank digital currencies (CBDCs) pose a threat to not only Bitcoin, but cryptocurrencies as a whole.
Whatever the future of Bitcoin and cryptocurrency, it will be marked by market volatility as it endures the growing pains of a new asset class.
Note: Investors should consider Bitcoin and other cryptocurrency investments a speculative asset, and any crypto investment comes with the risk of loss, including total loss of capital.