Bitcoin is the first decentralized digital currency and is controlled and managed using cryptography. Cryptography is a type of technology used for computer passwords, ATM cards and E-commerce where in it prevents third parties or the public to view private data. It means, Bitcoin is not controlled by any authority or anybody. It uses a public ledger called Blockchain wherein everybody can see all the transaction history, showing only Bitcoin addresses and the amounts transferred.
Lets take the roller coaster ride through recent time and see Bitcoin’s history.
Before bitcoin was released, there were already a number of digital currencies proposed. Stefan Brands and David Chaum invented an issuer based Ecash protocol. Also, hashcash was developed by Adam Back which is a proof-of-work scheme that prevents and controls spams. Then came the B-money, Bit gold and RPOW. These digital currencies used hashcash as their proof-of-work scheme. B-money and Bit gold were both proposed at around the same time by Wei Dai and Nick Szabo respectively. RPOW, a reusable form of hashcash, was then implemented by Hal Finney which is based on IBM secure TPM hardware and being attested remotely.
The Beginning of Bitcoin
Legend says, Satoshi Nakamoto started working on the concept of Bitcoin in 2007. Record also says that Nakamoto is a Japanese software developer but was speculated to be more than one person using a collective pseudonym Satoshi Nakamoto.
Satoshi Nakamoto posted a paper in the internet entitled Bitcoin: A Peer-to-Peer Electronic Cash System. It tackled a detailed instruction in generating a system of electronic transactions without depending on trust using peer-to-peer network. The project was then registered to Sourceforge.net.
The Bitcoin network started and the first open source bitcoin client was released. The first bitcoins was issued with a number of 21 Billion through the year 2040. The first block of bitcoins called the “genesis block” was mined by the creator itself, Satoshi Nakamoto with 50 bitcoins of reward. The first transaction was also made by Nakamoto with Hal Finney.
Giving rise to the growth of Bitcoin – October 2009
An exchange rate was established by New Liberty Standards with 1 US dollar equivalent to 1,309.03 BTC. The rate was based on the cost of electricity used for computers that generates bitcoins.
Also, in this month #bitcoin-dev channel hits freenode IRC which is a network for free and open source development discussions.
The first ever Bitcoin market was established by Dwdollar, which is not anymore existing.
A very notable transaction happened in one of the bitcointalk forums with the value of 10,000 BTC in exchange for two pizzas from Papa John’s.
Abundant growth comes at a price – August 2010
A major problem occurred in the bitcoin protocol. Bitcoin transactions were not completely verified before it reaches the block chain. This have caused users to avoid the economic restrictions of bitcoin and make a limitless amount of it. It was then exploited a few days later when an over 184 billion transaction sent to two addresses was spotted on the network. The bug was fixed and the transactions were erased in the Blockchain.
Bitcoin was then on the hot topic after the August hacking and the following blockchain vulnerabilities spotted in September. A report from an inter-governmental body was published on money laundering and suggested that bitcoin payment methods could finance terrorists.
The virtual money reached one million dollar. Based on the number of BTC in flow, the value of Bitcoin reached a rate of $0.50 per BTC.
A controversy arose when Silk Road, an illegal drug distributor was established. They used bitcoin as a way to anonymously buy and sell drugs online.
For the first time, BTC reached parity with the US$ and in June the same year, Bitcoin had an equivalent value of $31 which gave it a market capital of $206M.
FINCEN or the US Financial Crimes Enforcement Network issued the world’s first regulation for BTC using a guidance report for individuals who administers, exchanges or uses bitcoins. This had caused the start of the ongoing debate on how to best regulate the virtual money.
Also, in the same month BTC’s market capital reached 1 billion dollars.
In a case against Trendon Shavers, tagged as ‘Bernie Madoff’ of bitcoin, Federal Judge Mazzant noted hat the virtual money is clearly useful as money in buying goods and services. Bloomberg started trying bitcoins on its terminal though there are other ticket alternatives, the endorsement added more institutional legitimacy to Bitcoin.
Bitcoin US$ rate increased to $700 as the US Senate had its first hearings regarding digital currency. Ben Bernake, the Federal Reserve chairman, gave his blessing to BTC. He noted in his letter to the government affairs committee and Senate homeland security that bitcoin may hold great promise especially if it will raise a faster and more secure and efficient payment system.
Central bank in china did not permit financial institutions to handle BTC transactions. The ban was implemented when the People’s Bank of China said that BTC is not a real currency and is not legal compared to fiat money. The ban sees a risk of bitcoin to China’s financial stability and capitalisation controls. But today, China is the biggest bitcoin trader with over 80% of the world’s bitcoin transactions happening in china.
Bitcoin regaining credibility and traction – January 2014
Elliptic, a Bitcoin storage service provider, launched the first bitcoin storage insurance service for business clients. Bitcoins stored in Elliptic are insured by Fortune 100, an insurance company, and are held in full reserve. Which means, Elliptic does not use their clients’ bitcoins for reinvestments, instead they keep them securely in a cold deep storage.
The first online retailer to accept bitcoin payments in the US was Overstock.com and is still one of the biggest companies today that embrace BTC.
Bitcoin was classified as private assets by HMRC which means that mining and trading of bitcoin is exempted to VAT. This treatment to bitcoin has been one of the most important and most progressive. UK government played an important role to bitcoin taxation for its comprehensive and forward thinking towards it.
When Silk Road, the illegal online market that sells illicit drugs, seized by the US government, the exploited 29,000 bitcoins was then auctioned. This case gave an understanding on the potential uses of bitcoins to the BTC community. Also, the seizure and the bitcoin auction has remained Bitcoin’s legitimacy. This means that bitcoin will nevee be considered as the currency for crimibals. Although bitcoin remains to gave anonymous transactions, user’s identity can often still be established.
The New York State Financial Services Department released the first draft of its proposed regulation for digital currencies. Also, the European Banking Authority had their opinion that virtual currency exchanges should comply requirements on AML or Anti-money laundering and Counter-terrorist financing.
Also, in the same month, Global Advisors Bitcoin Investment Fund (GABI) launched the world’s first Investment fund for BTC.
George Osborne Exchequer’s Chancellor showed support to bitcoin by purchasing £20 worth of BTC. He also anniunced that HM Treasury calls for Information in digital currencies, giving bitcoin businesses the chance to give comments on the benefits and risks and the possibility to influence government policy in the future.
The NYSE (New York Stock Exchange) invested on Coinbase’s $75 million funding round aiming to reach the new asset class with security, transparency and confidence to BTC.
Bitcoin in the future
Bitcoin continues to go its way to a widespread and legitimate adoption by major institutions by having solid regulations. New York’s BitLicense lately has been the world’s first digital currency regulatory jurisdiction. European Banking Authority and European Central Bank have also released legalities and regulation of the industry by the EU to have more control on price changes.
Also, Bitcoin already made its way to the financial influences with HM Treasury’s reports regarding anti-money laundering (AML), consumer protection and standardisation for UK bitcoin companies. In result, more and more financial services will be engaged with the bitcoin technology.
How is Bitcoin being used
Bitcoin is a digital money. It is used to buy any products and services electronically. You can sign in an account from a number of bitcoin wallet services online such as Coinbase.com. There are three major ways to obtain bitcoins. First is by buying them from a bitcoin exchange. Secondly is by selling goods and services in exchange for them. Third is through bitcoin mining where you use a software to verify bitcoin transactions. Of course the simplest way is to buy them using fiat money.
In bitcoin transactions, the sender usually enters his bitcoin address to pay a certain amount of bitcoin and a private key. It depends upon the interface of the website you are visiting. Also there are companies now that offers ATM cards to let users buy items at real physical stores that accept bitcoin. The ATM card is linked to their bitcoin wallet account online. 2014 was already a great year for Bitcoin.
There is a lot of promise this virtual money can offer. If regulated properly and tightly, this could lead to more good things than what we expect for.