Are you one of the 84.02 million wallet holders of cryptocurrency?
Cryptocurrency is one of the most hotly debated global financial topics today. In 2013, Forbes named Bitcoin (BTC) the year’s best investment. In 2014, Bloomberg countered with its proclamation of Bitcoin being the year’s worst investment. From the early days of the FBI shutting down the dark-net black market to the Securities and Exchange Commission approving ProShares Bitcoin Strategy (ticker: BITO), the first Bitcoin ETF, in Oct 2021, cryptocurrency has had an exciting and volatile history.
Here are some of the highlights of Bitcoin’s relatively recent history:
— How Bitcoin started.
— Bitcoin core concepts.
— Bitcoin price trajectory.
— Bitcoin adoption and controversy.
— Anticipating the future of Bitcoin.
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How Bitcoin Started
Bitcoin was the first cryptocurrency created and is now the most traded and well-known. It was first launched in January 2009 by a computer programmer or group of programmers under the pseudonym Satoshi Nakamoto, whose actual identity has never been verified.
A 2008 white paper by Bitcoin’s mysterious creator originally revealed the blockchain system that would be the backbone of the cryptocurrency market. A blockchain is a digital ledger of transactions that is replicated and distributed across a network of computer systems to secure information.
Bitcoin Core Concepts
Block. A block of coins is divisible to eight decimal places. A millibitcoin (mBTC) is 1/1000 of a Bitcoin. The smallest unit is a satoshi (sat), which is 1/100,000,000 of a Bitcoin.
Transaction. A computer directive styled as “payer X sends Y Bitcoins to payer Z.”
Blockchain. Each transaction forms an unbroken link on the chain. This transparent, public chain is what allows Bitcoin to exist and be usable.
Mining. Independent individuals or groups complete intensive and costly computer calculations to create a block.
Block hash.Mining activities incorporate a record-keeping service that keeps the blockchain consistent, complete and unalterable. The hashes validate available Bitcoin and serve as a means of uniformly rewarding the miners.
Blockchain address. A sequence of 25 to 34 alphanumeric characters. This is the information that is given to other parties so they know where to send the coins. They are considered pseudonymous because, while the blockchain itself is public, the address shields personally identifiable information. Cryptocurrency exchanges may be required by law to collect personally identifiable information, but each transaction can be associated with a different Bitcoin address to maintain privacy.
Wallet. Any individual or entity wishing to exchange Bitcoin must create a digital collection of the credentials, known as a wallet, necessary to transact coins.
Full clients. This is a wallet that includes a full copy of the entire blockchain. This is the safest form of storage, but it requires substantial digital space.
Lightweight clients. This is a wallet that includes a more limited version of the blockchain in order to enable it to be portable on devices, such as a smartphone. Since the entire blockchain is not available, a party using a lightweight wallet must trust intermediaries who have full wallets.
Keys. These are the credentials stored in the wallet. Like a safe-deposit box, there are two keys necessary for each transaction.
— Public. This is the technology necessary to encrypt and decrypt transactions. It is “one way,” meaning that it easily unlocks transactions, but it is very challenging to reverse the transaction. This key enables the blockchain to be uninterrupted.
— Private. This is the passcode that transacting parties initiate so that the transaction is unique to themselves. To spend Bitcoin, one must know the corresponding private key and digitally sign the transaction. The party’s signature is verified by the public key without revealing the private key.
If the party “loses” its key, the Bitcoin is unrecognizable and essentially of zero value. According to Glassnode, a blockchain analytics company, it is estimated that 10% to 25% of Bitcoins have been forgone by parties who lost the private key. Additionally, if the private key is revealed in a security breach, it is possible for the value of Bitcoins to be stolen and virtually unrecoverable. In 2022, cryptocurrency investors lost a record $3.8 billion to hackers.
Cold Storage. Private keys are stored offline to help avoid losing them or exposing them to a security breach.
[READ 7 Best Cryptocurrency ETFs to Buy]
Bitcoin Price Trajectory
Bitcoin has had a volatile history. Mark T. Williams, a faculty member at Boston University’s Questrom School of Business, once said that “Bitcoin has volatility seven times greater than gold, eight times greater than the S&P 500 and 18 times the U.S. dollar.”
The Bitcoin supply was capped from the beginning by Nakamoto in order to drive supply and demand. The maximum number of coins stipulated to be in existence was 21 million. As of Jan. 29, there were 19,276,325 Bitcoins in existence. However, the mining operators of Bitcoin regularly round down calculations as each block of coins is created, leading experts to believe that it will take until the year 2140 before the cap is reached.
After Nakamoto rolled out Bitcoin in 2009, he mined approximately 1.1 million Bitcoin and disappeared in 2010. He ceded control to Gavin Andresen, formerly known as Gavin Bell, who set out to decentralize the platform. This meant that there was no central authority, server, storage or administrator. All the parties were peer-to-peer and the blockchain was distributed to all. The network existed merely to legitimize and confirm the transactions. The price of Bitcoin dropped with the new uncertainty surrounding these actions.
However, control issues emerged when GHash.io, a cryptocurrency mining pool, exceeded 51% hashing power for the first time. One of Bitcoin’s tenets is that power cannot be accumulated in too few hands, and GHash’s popularity meant that it was possible for coins to be double-spent, or counterfeited, and they could push other miners out of being rewarded for their activity. Fortunately for the Bitcoin industry, the parties voluntarily enacted provisions that redistributed hashing power to acceptable, sustainable limits.
The first Bitcoin real-world transaction occurred on May 22, 2010, a date known to Bitcoin enthusiasts as Bitcoin Pizza Day. Laszlo Hanyecz paid 10,000 BTC to have two Papa Johns pizzas delivered to him. The pizzas retailed for about $25. At the peak of Bitcoin’s pricing in 2021, the two pizzas would have been worth $630 million.
Part of the extreme volatility in Bitcoin comes from the Gartner Hype Cycle, a life cycle common among new and innovative technologies. The five stages include: the innovation trigger, the peak of inflated expectations, the trough of disillusionment, the slope of enlightenment, and finally, the plateau of productivity. Many individuals created and then lost vast fortunes in Bitcoin, causing eight Nobel Prize winners in economic sciences to call Bitcoin a bubble, much like the oft-cited Dutch tulip mania in the 1600s. However, Bitcoin supporters point out that although Bitcoin has crashed five times, it has also returned to its previous price each time, while other bubbles have not recovered their value.
The strength of the economy is also a huge factor in Bitcoin pricing. In what has been designated as the 2022 “crypto winter,” sharp declines occurred in Bitcoin pricing as the Federal Reserve began aggressively increasing interest rates to stave off inflation. Investor appetite for risk all but disappeared and liquidity became a major issue among the exchanges. Bitcoin’s value decreased over 60% from a high of $68,990 in Nov 2021, and pessimism in the markets still persists.
[SEE: 7 Ways to Diversify Your Crypto Portfolio and Limit Risk.]
Bitcoin Adoption and Controversy
Bitcoin supporters also note that more and more institutions, countries and platforms are accepting the digital currency, and they hold hopes for Bitcoin to become a global reserve currency.
Bitcoin is legal in seven of the top 10 world economies by GDP, including the U.S. Nine countries have had an outright ban on Bitcoin, including Egypt and Pakistan. Another 42 countries have implicitly banned Bitcoin, including Saudi Arabia and Taiwan.
Some countries have actively begun trading in Bitcoin, often due to global financial pressures. El Salvador adopted Bitcoin as its legal tender in 2021 in order to resolve deep economic woes. Unfortunately, the price of Bitcoin dropped precipitously since, the country is still struggling to meet its debt obligations, and public adoption has been lackluster.
Ukraine posted two crypto wallets at the beginning of the Russian invasion to raise funds, attracting more than $10.2 million within the first week to fund both humanitarian needs and military support. Ukraine anticipates rebuilding its economy using blockchain technology. Iran has transacted $8 billion in Bitcoin in order to bypass U.S. financial sanctions on the country.
Bitcoin has also attracted controversy due to its climate change implications. Mining bitcoin requires significant electricity usage and is responsible for 0.10% of global greenhouse gas emissions. The University of Cambridge publishes the Cambridge Bitcoin Electricity Consumption Index (CEBCI), which provides estimates on the greenhouse gas emissions related to Bitcoin, currently calculated at 48.35 million tonnes of carbon dioxide equivalent.
Anticipating the Future of Bitcoin
Although Bitcoin is having a banner first few months of 2023, up roughly 40% year to date as of Feb. 27, the cryptocurrency industry as a whole was dealt a major blow by the collapse of Sam Bankman-Fried’s crypto exchange FTX and sister firm Alameda Research. The fallout may be felt for quite a while, and Congress will be determining what regulations are needed for Bitcoin going forward. It remains to be seen whether the industry can remain true to its decentralization goal.
However, the time is also ripe for new innovation to take place in blockchain technology, including non-fungible tokens, or NFTs, on the Ethereum blockchain. Web3 applications are also gaining momentum, especially in the gaming space, where digital currencies would have an eager audience.
Artificial intelligence is also rising in trading applications. Blockchain technology may be the key to determining what content is AI-driven vs. uniquely human, a differentiator that has great potential impact on the overall public adoption of AI.
However, despite the bumps in the road, blockchain technology is here to stay, says Marion Laboure, a senior economist and market strategist at Deutsche Bank Research. The $1 trillion market cap for cryptocurrencies is simply too big to ignore, Laboure says.
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The History of Bitcoin, the First Cryptocurrency originally appeared on usnews.com
Update 02/27/23: This story was previously published at an earlier date and has been updated with new information.