11th August 2019
Information

History and Origins

The concept of a decentralised digital currency has been around since the late 1990s. b-money and Bit Gold were two early proposals for limited-supply peer-to-peer currencies, with Bit Gold in particular being very similar in design to Bitcoin.

At the time, these proposals gained little support, and the concept of a decentralised currency saw no progress. So what triggered the eventual creation of Bitcoin?

Motivation

To understand why cryptocurrencies were created, it is important to look at the systems governing traditional currencies, and how they have changed over the years.

Traditional currencies have historically been linked to an asset, most recently, gold. Through a mechanism known as the 'gold standard', a unit of currency would be worth a set amount of gold. Due to their being a limit to the quantity of gold available, the amount of money in the financial system was limited.

Throughout the 20th century, Governments began to abandon the gold standard, severing the link between currency and an asset. The UK scrapped the gold standard in 1931 during the 'Great Depression', and in 1944 a new system was introduced linking major currencies to gold prices indirectly through the US dollar (The Bretton Woods system).

In 1971, Richard Nixon broke the link between gold and the dollar, meaning the worlds major currencies are no longer tied to an asset. Currencies without an asset link are known as 'fiat' currencies.

Removal of the gold standard allowed money to be printed freely. Printing more money allowed increased levels of investment and lending, while also causing a rise in inflation. Inflation acts a driver towards greater spending, as prices are expected to rise in the future. This in turn leads to more money flowing into businesses, and higher Government tax revenues.

However, this looser system allowed the creation of a seemingly limitless amount of credit. Banks took greater lending risks, which eventually leads us to the 'Great Recession' of 2007.

Due to the recession, the idea of taking control of currency away from central banks, and creating a limited currency supply, gained traction. This marked the beginning of a new age of digital currencies, ushered in (somewhat ironically) by a currency with many parallels to the old 'Gold Standard' system.

Timeline

The first proposals for Bitcoin surfaced in 2008. The initial paper, outlining the design of Bitcoin, was published on 31st October. This paper is available here.

Developer Satoshi Nakamoto, an unknown person/group who has never been publicly identified, created the first Bitcoins in 2009. The first block, used to generate 50 coins, contains the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". This is a reference to the title of an article in The Times, detailing plans by then UK Chancellor Alistair Darling to pump billions more into the UK banking system in order to prevent its collapse.

Timeline
Timeline of the history of cryptocurrency.

Despite being classed as a currency, Bitcoin was largely useless in the first year after its creation. At this time, the currency could be exchanged for US$ at a rate of $1 ~ 1300BTC. There were, however, several updates to the core software that governs the network during this time.

In May 2010, an indirect exchange allowed for the first Pizza to be purchased using Bitcoin. As Bitcoin itself was still not accepted as a form of payment, an intermediary accepted the Bitcoin in exchange for making a purchase on behalf of the sender. Around $25 worth of pizza cost 10,000BTC.

In 2011, other cryptocurrencies began to emerge, based on the same system used by Bitcoin. The first major companies began to accept Bitcoin payments. Since then, thousands of new cryptocurrencies have been created.

Bitcoin surpassed $1,000 for the first time, on November 27th, 2013.

Fast forward to 2017, and the value of a Bitcoin had soared to over $15000. Over a thousand cryptocurrencies were in existence, and there was a growing acceptance of the technology behind crypto networks. However, despite the growing awareness of cryptocurrencies, there was still little acceptance of them as a currency.

In February 2019, JPMorgan announced the creation of their own cryptocurrency, designed for business payments. This was followed up later in the year by Facebook, announcing plans to create a cryptocurrency called 'Libra'.

The Future

It is, of course, difficult to predict how cryptocurrencies will evolve in the future.

With so many cryptocurrencies being created, it seems inevitable that a some point, consolidation will cause the best design currencies to dominate.

It will be interesting to see the impact of the involvement of both JPMorgan and Facebook in the crypto market, given the size and reach of both companies.

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