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The History of Bitcoin
In two thousand and eight, one of the first ever Bitcoin transactions was recorded. It was for the purchase of two pizzas, exchanged for ten thousand bitcoins. As I write this, less than ten years later, in December twenty seventeen, a single Bitcoin, on its own, costs over eleven thousand dollars. This makes the bitcoins exchanged for those two pizzas, now worth over one hundred and ten million dollars. You might ask how on earth is this possible?
Well, it is possible. But if you want to learn more, and understand what Bitcoin truly represents, you must begin with Bitcoin’s history, and also learn how Money is actually created. Take your mind back to the Global Financial crisis, at it’s height in two thousand and seven. Banks, Financial Institutions, Mortgage Companies, and Insurance companies around the world were in extreme financial difficulties. As the financial system is connected like dominoes, when one institution falls, this can affect many others.
Financial institutions began to fail because of their own bad, or indeed illegal practices, such as the subprime mortgage scandal. Subprime, and other financial scandals left major banks and institutions with mountains of bad debts, with some near collapse. Things were so bad during this period, that many ordinary people in different countries such as Greece and Cyprus lost homes, or savings due to failures within financial and banking institutions.
Governments in Western Countries responded with Bail-ins. Failing Banks, insurance companies, and mortgage companies were in effect taken over by the Governments, and their vast debts were secured by tax payers.
Central Banks, including the Federal Reserve, began creating electronically, tens of Billions of dollars of completely new money every month, in a process called Quantitative Easing. Each month, the Fed used this newly created money to buy tens of billions of dollars of subprime Mortgages, and other financial assets, such as government bonds. Banks in trouble also borrowed directly from the Federal Reserve during the crisis, to the sum of one point two trillion dollars. This further increased their debt, and created trillions of dollars in new money through debt expansion, but was needed to keep the Western financial system functioning. Very quickly, the level of debt on the Federal Reserve balance sheet rose to dangerous levels.
What is Money?
At this point, let’s examine what the definition of Money actually is. Money is loosely defined as a store of value, which is portable, and can easily be exchanged for goods and services. This is essentially all that money represents. So, as a store of value, it may surprise you to know that in our modern world, most of our money is actually created through debt. For example, when someone takes a mortgage or loan from a Bank, nobody from the Bank actually opens a vault to get that money. The mortgage or loan, is placed onto the Banks balance sheets as a debt to be paid back by the customer. The transfer is usually digital, with no cash involved. Banks are allowed to do this through a system called Fractional Reserve Banking. This means they can legally ‘lend out’ money that they don’t actually have. Instead, they create new money through debt expansion, which largely exists only digitally, inside a computer.
Over a number of years, larger and larger sums of this newly created money, begin to circulate wider and wider through society, chasing a limited amounts of goods, such as homes, cars, food, or services. With all this additional money in circulation, prices naturally rise to absorb the available volume. These natural price rises are, what we call, inflation.
Throughout western financial history, times of great booms in stock markets, were immediately followed by equal periods of bust. Banks and Financial institutions have many times proven themselves vulnerable during downturns due to their excessive levels of debt. When this debt turns bad, it can quickly bankrupt the bank.
Dow Jones – Over 100 Years of Boom and Bust
Take note of how high the Dow Jones chart now reaches, and compare this to the preceding hundred years. Do you see a pattern? If we look at this Dow Jones Stock Market chart over the last hundred years, we can see repeated booms and busts, many caused by financial and banking practices. These repeated periods of Booms followed by Busts in the global economy, have caused real hardship for many millions of people, and will continue to do so.
Enter Satoshi Nakamoto & Bitcoin
Into this period of financial turmoil, in October of two thousand and eight, a technical paper, called “Bitcoin: A Peer-to-Peer Electronic Cash System”, was published on the internet, by someone going by the name of “Satoshi Nakamoto”. The name Satoshi Nakamoto, the person named on the Bitcoin paper, is generally accepted to be a pseudonym. The truth is that nobody knows who Satoshi Nakamoto actually is. They might not even be an individual. But we do know that they probably still own around a million original bitcoins.
The Bitcoin paper described the sophisticated algorithms, and cryptology to be used to both confirm transactions, and create new Bitcoins at a steady rate, until a total of twenty one million existed. Although twenty one million seems like a low number for a currency supply, a single bitcoin can be reduced down to as much as eight decimal places, making very small payments possible. It described the encrypted public ledger, where all Bitcoin transactions are stored, and confirmed in a public file, called the BlockChain.
New Bitcoins would be created during the process of confirming blocks of transactions, and given as a reward to computers confirming these transactions, called Miners. This is how new Bitcoins are created, and where the term Bitcoin Mining originates. The creation of new digital currency units, or Bitcoins in this way, to gradually increase the money supply, is the opposite of what happens in the current money system controlled by the Banks, where money is created through debt.
A Programming Development community quickly formed around the Bitcoin idea, and soon Bitcoin began to take shape in the real, albeit digital world. The core Bitcoin Community Developers, maintained the Bitcoin Software as Open Source, which means the code can be examined by anyone.
With Bitcoin, no central authority, such as a Government or Bank is required, in order for bitcoin to operate. What Bitcoin suggested back in two thousand and eight, was that a new form of money for the digital age was possible. Bitcoin promised a new digital currency, which would grow steadily, and which could remain free from centralised interference.
For the first few years of its development, Bitcoin remained largely unknown in society, except for a few computer nerds. Within mainstream media and finance institutions, some regarded Bitcoin and digital cryptocurrencies as a threat to Banking Control, while others saw Bitcoin as the next logical step in the Digital age. As the years have passed, Bitcoin has endured much negative press, including threats of banning bitcoin, although exactly how that could be accomplished is easier said than done.
Some negative press has been justified, and should serve as a warning to anyone who wants to rush into Bitcoin without knowledge of the safety precautions that must be taken. The Bitcoin community has witnessed wild price swings driven by speculation, plus multiple Bitcoin hacking thefts, and failures in Bitcoin exchanges over the years. One of the largest failures was the Mount Gox exchange, which was responsible for almost seventy percent of the entire bitcoin market by two thousand fourteen. Mount Gox went bankrupt after it was revealed that eight hundred and fifty thousand bitcoins, belonging to its customers, had been stolen. You can also lose Bitcoins from things such as hardware failures, lost passwords, data corruption or of course theft, either digitally or physically. As Bitcoin is not regulated and operates without a central authority, there is nobody to complain to, if you lose your Bitcoins for any reason. This is something very important to be aware of before diving into bitcoin.
However, one thing has endured throughout all of the negative press, the exchange failures, the fraud and the wild price swings caused by speculators, and that is bitcoin itself. It’s still here after almost ten years, and the Bitcoin world is getting larger, not smaller. The development community around Bitcoin is now much stronger. Bitcoin today cannot be called just something for the computer nerds. Nobody can say for sure what the future of Bitcoin will look like in the coming years. Bitcoin could continue to grow into an acknowledged digital currency, and enter the global mainstream, or it could be replaced by a newer and better technology and become worthless. Time will tell.
However, if you are tempted to enter the Bitcoin world, then you must know what you’re doing. And that’s where we can help. Sign up for our Email list above, and we will let you know when Bitcoin for Beginners is ready.