Bitcoin for Everyone

Lesson 2 – A Brief History of Bitcoin

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Welcome back to Bitcoin for Everyone, an original Coin Academy course, Our Introduction to the World’s most popular alternative currency. There are 8 lessons in this course, this is the second lesson entitled, A Brief History of Bitcoin, in which we take a look at the origins of Bitcoin and a bit of what’s happened over its short but very interesting life span.

So here we go.

How did it all get started? Well it all started back in 2008, when the system now known as Bitcoin was first described in a scholarly White Paper. We don’t know exactly who published that paper it was published under a pseudonym, the pseudonym was Satoshi Nakamoto. Was this one guy? Was this a group of people? No one knows for sure, a lot of people tend to suspect it was actually a team of individuals, but again no one knows for sure.

There was some press recently that Satoshi Nakamoto had been found, that this was the guy, but that gentleman vehemently denies that it was him, so the mystery remains. Will we we ever know who he is or who they are? Possibly but certainly not right now, and really it’s irrelevant, what’s important is that, that white paper is widely regarded as an excellent piece of scholarship and a number of people began to look seriously at the system that was outlined on that white paper and finally in 2009, a short while later enough people had implemented that system that Bitcoin became a reality.

Now, how could this happen? Well it’s because what was described is open source, that is the code is not owned by anyone. It can be reviewed by anyone, it can be copied, it can be used by anyone, it can be implemented on any machine anywhere in the world. Open source is without restriction on use, people can actually make copies of this and create their own currencies based on the Bitcoin system if they want, in fact several people have done that, but the important point here is that since it is open source, it is transparent, we know exactly what is in there, we know exactly what occurs, we understand completely the entire process that leads to the creation of the coins, to the validating of transactions and to the updating of the ledger, and that level of transparency is one of the things that makes Bitcoin special.

Since 2009 Bitcoin has grown at a fairly spectacular rate. It’s really hard to believe some of the numbers that have come out of it but they are the reality. Valuation has gone from pennies per Bitcoin to a high of over $1,200 per Bitcoin in late 2013. That’s come back down quite a ways but still that was the peak high in December of 2013. The number of miners that is the people who help validate the transactions in exchange for being given new Bitcoin has grown dramatically. The exact numbers of miners are unknown. Largely because many of them have banded together to form what is known as a mining guilds so they pool their computing power to perform the task and they share in the benefits of that. The collective mining power we know however, it now exceeds the power of 500 of the world’s top supercomputers. Put another way, the Bitcoin network is now literally the most powerful computing platform in the world.

Let that sink in for just a minute.

How widely is Bitcoin accepted? Well the number of people owning Bitcoin is unknown, partially because the system does allow you to preserve anonymity in your transactions, but looking at the number of addresses that are associated with the transactions we can say that it’s somewhere between 600,000 and 1.2 million.

I know that’s a very broad range but again anonymity is one of the keys of the system. It’s possible that multiple people own one address or working off one address or one person has multiple addresses. It’s simply not possible to know. This is really a best guess.

The daily turnover in Bitcoin frequently tops 30 million US dollars at this point. At the peak of the trading activity in December 2013, it was topping 70 million dollars a day. There’s an increasing number of companies and individuals that now accept Bitcoins in payment, which means it’s increasingly possible for you to buy goods and services with Bitcoin. One provider claims that over 35,000 merchants that currently accept Bitcoin! Now I would say that, that number could actually be on the low side because if we talk about 35,000 merchants accepting Bitcoin this would be 35,000 merchants who are working through traditional point of sale methods as opposed to freelancers, contractors, programmers, designers, artists, other craftsmen around the world who are accepting Bitcoin directly and they don’t use traditional point of sale systems.

Bitcoin ATMs have also begun to appear in major cities, again signalling wide spread adoption and increasing dramatically the utility value of the Bitcoin. These ATMs are neat because not only can you buy Bitcoin but you can also withdraw local currency using Bitcoin: very handy with travelers and very handy in general as a way to avoid having to deal with exchanges.

There have been issues in this brief history of Bitcoin, obviously the volatility we talked about earlier is an issue to go from pennies per Bitcoin to over $1,200 per Bitcoin to back down to $500 per Bitcoin, which is where we are today is one issue. But there have also been several high profile incidents that have garnered a disproportionate share of press and that’s really why we want to talk about them because they have been such magnets for controversy.

First was the Mt. Gox incident. Now, Mt. Gox was an early Bitcoin exchange and for a time, the largest, in fact the largest by a long measure. It was based in Japan. That exchange was a victim of a theft. A number of clients lost their Bitcoins, a large amount of Bitcoins, a large amount of monetary value was lost. That theft, subsequently led to Mt. Gox’s bankruptcy. That issue as we record this today is still open, there are still people trying to get their money back, there are still people looking at prosecutions, it has been taken quite seriously but the bottom line is this was a significant incident that cost a lot of people money.

Another incident that a lot of people know about was Silk Road. Silk Road was an online marketplace and it was unrestricted, it was operating without the usual regulatory oversight that you would see with an online marketplace like Amazon. They sold all sorts of things, everything from drugs to arms, to you name it, it’s available there. They accepted Bitcoins and because of the anonymity of Bitcoins they generated a large transaction volume in Bitcoins. Silk Road was eventually closed, a number of the key players were arrested and the assets were seized and included in those assets were Bitcoins. In fact, subsequently the US Government, which executed the seizure sold those Bitcoins in auction, a large number of them been purchased by Elon Musk in fact.

But these two issues, though they garnered tremendous amounts of press, you need to put them into context. What you need to remember is that neither Mt. Gox nor Silk Road were part of Bitcoin. They were simply businesses that traded in Bitcoins. Now, what happened to them is cautionary, certainly you need to make sure that you’re, that you choose well when you choose an appropriate exchange, you shouldn’t be dealing with businesses like Silk Road. But this bears no relation to the validity of Bitcoin. Bitcoin was simply a medium of exchange that was used in both of these places. The media love these stories, they are very sensational, they are great reporting fodder but you need to put them in context. They don’t define Bitcoin in any way, shape or form. Where we are today, is really a tribute to that preliminary White Paper which set out this system and has been adopted worldwide by a large number of programmers, developers and financial experts, and where we are today with this very large transaction turnover volumes, significant marketcap and a large number of people holding Bitcoins is a tribute to the original work and to the stability, longevity or potential longevity of this new and exciting alternative digital currency.

That’s it for the second lesson join us for Lesson Three.